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Publication 970

Student Loan  
Repayment Assistance(p35)

Loan repayment assistance programs (LRAP) provide help in repaying student loans for those who work in public service occupations or in areas with unmet needs. Examples of such occupations are health care professionals in underserved areas, attorneys in legal-aid offices and prosecutor's or public defender's offices, and classroom teachers in subject areas with shortages.
An LRAP loan refinances your original student loan(s). After you work for a certain minimum period of time in a qualifying position, all or part of your student loan indebtedness is forgiven.
The amount of your loan that is forgiven is tax-free if the LRAP meets certain criteria. Repayment assistance received under the following programs has been determined to be tax free. If your repayment assistance is from a source other than those listed, contact the program administrator to see if the LRAP qualifies for tax-free assistance. The program must meet the qualifications listed earlier in this chapter under Qualifying Loans.
You cannot deduct the interest you paid on a student loan to the extent payments were made through your participation in the above programs.