The (Non)Taxation of Student Debt Cancellation: Statutory Misinterpretation and Normative Conflict

John R. Brooks

National Tax Journal, 2024, vol. 77, issue 3, 623 - 653

Abstract: Student debt cancellation is an increasingly important form of subsidy for higher education and reflects a shift toward financing higher education with income-contingent loans. But the legal formalities of debt cancellation expose borrowers to the risk of taxation, especially after 2025. This paper shows that the Internal Revenue Service and the Treasury’s position that student debt cancellation is sometimes taxable is based on a misreading of the tax code and its history. It is further argued that this misreading arises in part because of the conflicting norms of tax policy and nontax social policy, a conflict that arises in other transfer contexts as well.

Date: 2024
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