by Tom Yamachika, President, Tax Foundation Hawaii

On April 27 of this year, Heald College, a 150-year-old institution with a campus in Hawaii, abruptly shut down. The Hawaii campus was one of 28 campuses owned by Corinthian Colleges; all of them shut down on the same day, displacing about 16,000 students, about 1,000 of which were in Honolulu.

The reason for the massive shutdown was that the college’s management misrepresented job placement rates to current and prospective students as well as accreditation teams. As Larry Barton, a former president of Heald College, put it:

Now, students who knew a respected name, Heald College, were often not aware that at Corinthian, profit sometimes trumped rigor in the classroom. Like numerous other for-profit institutions around the country, literally thousands of complaints were filed by the students with the feds about a failure to educate. Students often owed $40,000 or more in college loans – holding a degree they claimed was inadequate at best.

The decision last week by the Obama administration to essentially strip Corinthian of its ability to access federal funds is prudent, overdue and incredibly important. It is a signal to other for-profit and even not-for-profit institutions that a promise made – a degree that should lead to tangible employment – requires a hefty curriculum, high impact faculty and robust placement so that students can become gainfully employed and then repay their loans.

The aftermath, of course, was that there were thousands of students tossed out onto the streets – some with mere weeks remaining before they were supposed to graduate. Many of these students had to borrow substantial sums to pay for tuition and fees, and then were faced with the prospect of needing to go to another educational institution; having that institution determine how many credits, if any, could be transferred; and possibly having to borrow more money to pay the next educational institution while still needing to repay student loans for going to Heald.

Fortunately, the federal government offered a way out of this bind. Under some circumstances, student loans can be “discharged,” meaning the debt is forgiven and the student doesn’t owe anything on the student loan debt any more. Many of the Heald students with federal student loans took advantage of this program.

The story, however, does not end there. Generally, if you owe money and your creditor forgives the debt, you have income for tax purposes. The amount of income is the amount of debt forgiven. So the good news is that you don’t owe your creditor any more, and the bad news is that you generally will owe the tax authorities.

On December 3rd, the IRS announced that it issued Rev. Proc. 2015-57. Cutting through the technical language in it, the IRS is essentially saying, “Look. There may be some instances when these students realize taxable income, but there are lots of instances where they won’t. The same goes for federal education credits, which in a perfect world might need to be recaptured in some instances. It’s too much of a burden for them and for us to make them prove and have us verify that they don’t owe tax. So we will be perfectly happy if they don’t report anything having to do with the discharge of the Corinthian-related student loans, and we will use our time to do better things like catching real crooks.”

Merry Christmas, former Heald students. This is called “administrative discretion” and in our view it’s a perfectly logical and justifiable use of it.