Some law schools have set up Loan Repayment Assistance Programs (LRAPs) for graduates who do public-interest work. Under these programs, some or all of the graduate’s student loans may be forgiven after a certain number of years of public-interest lawyering.
Until now, the big question had been whether that loan forgiveness would constitute discharge of indebtedness for federal income tax purposes. Just today, the IRS has provided clear guidance: such loan forgiveness does NOT give rise to taxable income to the graduate whose indebtedness is “forgiven.”
The full text of Revenue Ruling 2008-34 is available here.