On March 18, 2012 the IRS released the Publication 970, Tax Benefits for Education for 2011 returns. Unlike in previous editions, the “Law school LRAP” is no longer listed as being tax free. According to the revised p970 edition for the tax year 2011 LRAP funds are taxable income unless for services in the health care profession as defined by the IRS p970 pages 36 and 37.
If you do report the LRAP forgivable loan as income you should be able to deduct the amount of the benefit used to pay interest under § 221 though the deduction is subject to a cap.
Since there is discussion within the law school community based on IRC § 108(f)(2) that the LRAP forgivable loan should not be taxable, we recommend that you consult with a tax accountant for further advice.
Please see excerpt of the 2011 Tax Benefits for Education p970.