The Consumer Financial Protection Bureau (CFPB) and U.S. Department of Education today announced a small but important victory for former students of Corinthian College who were alleged to have been deceived and lured into high priced student loans.
Under an agreement with ECMC Group, the new owner of some of the Corinthian College schools, about 40 percent of the outstanding balances owed by students will be wiped off the books. Hopefully without any tax consequences to the students. Technically, forgiven debt over $600 is subject to IRS reporting and unless insolvent, consumers owe income tax on the forgiven money.
A focus of the CFPB action against Corinthian College was the private “Genesis Loans” students incurred at the schools. In September2014 the CFPB filed suit against Corinthian Colleges, Inc., which included Everest College, Everest Institute, Everest University, Everest University Online, Everest College Phoenix, Everest College Online, WyoTech, and Heald College.
The suit filed alleged Corinthian College used illegal strong-arm debt collection tactics to push students to repay these expensive student loans. But more than 60 percent of students wound up defaulting on the high cost loans.
Under an agreement reached with ECMC Group, the company will reduce the amount owed by students in these private student loans by 40 percent.
In addition, ECMC Group has agreed that students who hold these expensive private student loans will not be threatened with legal action or be sued over this debt. In addition, borrowers will not be harassed or have their debts disclosed to third parties. And any listing on a credit report about these loans will be deleted along with any negative credit reporting.
Students who are eligible for this loan relief will receive the forgiveness automatically. There will be no process to apply for the loan forgiveness. More information on this can be found here.
The lingering question in all this good news for students who were sinking under these loans is if the loan forgiveness will cause them to go from being in collection by Corinthian College to a future collection effort by the IRS on the forgiven student loans.
According to the IRS, if your debt is canceled, forgiven, or discharged you will receive a Form 1099-C and you must report any taxable amount of a canceled debt for which you are liable as ordinary income from the cancellation of debt, on Form 1040.
All students receiving such student loan forgiveness should ask the loan servicer if a 1099-C will be issued so they can prepare for the potential new liability.
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