So would graduates incur taxes for the debt they won’t end up paying?
In general, if your debt is forgiven or discharged for less than what you owe, the amount of the canceled debt is treated as ordinary income and is taxable, according to the IRS.
“With respect to Mr. Smith’s gift, I don’t believe the students will need to pick up the amounts as income, since the lender didn’t actually forgive the debt,” said Michael Landsberg, a CPA and also an AICPA member.
Because Smith surprised the students and the school with his generosity, the specifics of how his gift will be handled, including any tax implications, are still being worked out, according to a statement from Morehouse.