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Finding the right college is not easy. The number of universities and colleges throughout the country can be overwhelming. Each student must find the right university to meet their needs. Once they find this dream school, they must figure out how to cover the expenses that come with going to college. For many, this means taking out student loans.

Ideally, the student focuses on their studies, graduates, gets a job and repays these loans. But what happens if the college closes? That was the question thousands of California students were forced to ask themselves when the Department of Consumer Affairs announced Brightwood College was closing its campuses throughout California.

Thankfully, those who had taken out federal loans were generally able to find relief through the federal loan forgiveness program. Unfortunately, the process comes with a catch.

What was the catch?

If money is exchanged, Uncle Sam may get a cut. The Internal Revenue Service (IRS) and state taxing agencies are interested in financial transactions. In this situation, taxing agencies generally consider the forgiveness of debt a taxable financial transaction. As a result, the IRS often requires taxpayers to report their forgiven debt as gross income.

Sound unfair? California lawmakers thought so. As a result, they recently passed a law that offers some relief.

What is the law?

California lawmakers proposed and passed a law that allows taxpayers to exclude the amount of student loan indebtedness discharged during the tax year from the filer’s gross income on their state tax returns. Governor Gavin Newsom reviewed and approved the law on October 2, 2019.

It is important to note the law provides relief to California state filings only. At this time, it appears taxpayers will still need to report the transaction on their federal returns as income.

Do all educational loans qualify for relief?

Unfortunately, not. To qualify, the loan must be used to cover the expenses for attending a for-profit higher education company and that the discharge be the result of one of the following:

  • The school did something wrong or failed to do something it should have.
  • The student was unable to complete their studies because the school closed.

Thankfully, this extends the law to apply to those who were in a similar situation in schools other than Brightwood. The law does not continue indefinitely. There is also a time limit. Currently, the exclusion only applies for tax filings from 2019 through 2023.