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The U.S. Department of the Treasury confirms, in a September 19, 2008, letter to members of Congress , that public service loan forgiveness under the College Cost Reduction and Access Act meets the requirements of Internal Revenue Code Section 108(f) and is therefore not taxable income to the borrower.

Although as a general matter, income from the cancellation of indebtedness is taxable, Section 108(f) allows the forgiveness of certain student loans to be excluded from taxable income if the student loans are forgiven as a result of the borrower working for a certain period “in certain professions for any of a broad class of employers.”

The Treasury Department indicates that student loans, including federal Direct Consolidation loans, forgiven pursuant to the College Cost Reduction and Access Act’s public service loan forgiveness provision, meet the requirements of this section, and the forgiven amount is not subject to tax.

Although the Treasury's letter does not bind the IRS to this position, it is a good indication of its position on the issue.