Surprise! Here’s When You’ll Owe Taxes on Student Loan Forgiveness (and When You Won’t)

taxes on student loan forgiveness

If you’re facing a hefty student loan balance, then you may have already considered pursuing student loan forgiveness to avoid having to pay back your loans.

But what you might not know is this: student loan forgiveness is taxable in many situations.

These taxes can create huge hidden costs when this forgiveness amount gets added to your tax bill.

Here’s what you should know about student loan forgiveness and taxes before you’re surprised with a tax bill

You Could Be Hit with a Tax Bill

For many borrowers, Income-Driven Repayment plans, such as Pay As Your Earn, coupled with student loan forgiveness can be financial saviors. These repayment plans cap your student loan payments each month at 10–15% of your income.

After some period—usually 20–25 years—of steady repayment, your remaining balance is forgiven.

However, there is an important factor to consider that’s rarely discussed. Even when it is mentioned, it seems to be only an afterthought or a clause in the fine print:

Under current Internal Revenue Service (IRS) rules, any loans forgiven under these programs are considered taxable income.

In short, this rules means that you could face a hefty tax bill when your loans are forgiven.

Let’s say that after making payments under IBR for 25 years, you’re left with $40,000 in debt. That $40,000 in forgiven debt would be considered taxable income.

In this case, your lender would send both you and the IRS a 1099-C form, stating the amount of debt forgiven—the same amount you’ll use when completing the necessary tax forms.

So, though you may not have to pay $40,000 in student loans, you would still have a hefty tax bill to pay. That $40,000 in loan forgiveness could mean a $10,000+ federal tax bill, and that doesn’t include potential state income taxes.

Of course, many variables determine your tax rate, but getting your loans forgiven could lead to a remarkably surprising tax bill.

If you can’t pay the tax bill, then you’d be forced to set up a payment plan with the IRS to make payments towards your tax debt. If you don’t take any action, then you could face a penalty and have to pay interest on this debt.

In another sense, if you dislike your student loan lender, then I imagine that you won’t be too fond of dealing with the IRS, either.

Possible Changes to the Current Tax Law

In light of the grim prospect of paying a massive tax bill on your student loans, discussions about changing the current tax law have been held. Last year, US Representatives Mark Pocan and Frederica Wilson introduced the Relief for Underwater Student Borrowers Act.

This act proposes to allow student loan borrowers in good standing with their repayment to become exempt from being taxed on their forgiven loans.

Currently, only loans forgiven through Public Service Loan Forgiveness and Student Loan Forgiveness for Teachers are exempt from being taxed.

Rep. Mark Pocan argues that the bill is important because it “closes a major gap in our tax code which penalizes some borrowers who have been granted debt relief after at least 20 years of consistent repayment towards their student loan debt.”

Despite discussions about reversing the current tax law, the bill has not yet been passed. However, since the student loan crisis continues to affect borrowers, sweeping changes may yet occur during the next few decades.

Despite the lack of changes, some borrowers still may be able to claim insolvency to avoid paying taxes on forgiveness. However, this likely only applies to a portion of borrowers who receive student loan forgiveness.

Of course, we can’t say what things will look like in 20 or 25 five years from now, when people start to have their loans forgiven.

In any case, it’s crucial to understand the current tax law so that you can avoid major surprises in the future.

To stay updated, continue to follow our blog for the latest information on student loan reform.

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Published in Public Service Loan Forgiveness, Student Loan Forgiveness, Student Loan Repayment, Taxes, Teacher Student Loan Forgiveness

  • Laura

    So if I’m on the income-based repayment, and after making payments for 25 years the rest of the loan is forgiven, does the forgiven amount count as taxable income for just that year? Or is it ongoing? Thanks.

    • Hi Laura,

      Yes, the amount that is forgiven would be taxable in that one year tax year. That’s with the currently regulations, but we hope this will change by the time you and other borrowers become eligible for forgiveness.

      Hope this helps. Let us know if you have other questions.

      Best,

      Jeffrey

  • Zac

    I have a fairly specific question. It was recommended by my graduate school that I choose REPAYE repayment schedule. My loans total about 280k at 6.5%. The government calculator reports that with my estimated income of 100k currently, after 25 years of payment my forgiveness will be 260k. And, I understand that under the current laws I will have to pay an income tax on that forgiveness. My question deals with my potential spouse’s loans. We are in the same profession; she is 1 year behind me about to graduate this May with the same debt. If she chooses the same plan, do our student loans/income impact eachother if we file taxes separately? Is there a way to keep everything separate so our incomes don’t impact each other’s repayment plans?

    What I am potentially concerned about is on my 25th year when I am granted 260k forgiveness plus both of our incomes we are looking at well over 750-500k income(depending on income growth). I am concerned how that income level will impact her 25th year student loan bill as every year a new repayment is calculated based on the previous years income. The loan calculator on Studentloan.gov suggests that with estimated income growth my 25th year payment will be 2,400. If our combined income with “loan forgiveness” is upwards of 750-500k, I am afraid her final 12 payments(based on the previous years income) will be enormous and negate the potential “loan forgivness” benefits we are trying to take advantage of.

    • Hey Zac,

      Thanks for your questions.

      To answer your questions, here are a few points:

      1. REPAYE factors in your spouse’s income no matter how you and your spouse file. This is unlike PAYE and IBR, which don’t if you’re “married filing separately.” So you’ll likely want to factor this in when deciding which repayment plan (if you’re eligible for others) and/or how to file your taxes. You can compare all income-driven plans using the calculator you referenced and here: http://studentloanhero.com/featured/complete-guide-income-driven-repayment-plans-federal-student-loans/

      2. That’s a great question. It certainly seems possible that this could happen (and I would refer back to point #1 of my response regarding which income-based plan you choose).

      I’d also add that there is some belief/hope that the law will change and all student loan forgiveness will be nontaxable. But unfortunately that’s not the case right now, so it makes planning for the future more difficult.

      I hope this helps. If you have any other questions, let me know.

      Cheers,

      Jeffrey
      Student Loan Hero

    • Cynthia Johnson

      It may not sound like an ideal solution–but you don’t HAVE to claim forgiveness the year before your wife. You could just wait until the next year and both claim forgiveness when she’s eligible. Thereby, the issue of her last year’s payments is moot, and it would never of a concern. But then like anything–fixing one problem creates another. You’d then be filing and getting forgiveness together in the same year, which will result in doubling what’s added to your yearly income for tax purposes. I’d talk to a broker about what makes most sense financially by running the numbers and weighing what potential issues could arise from either scenarios. Or you could both just go into the public sector, and be done with your loans in 10 years 🙂 I’m 4 years into my 10 years of forgiveness, and the public service student loan forgiveness program is tax exempt!

  • Sara

    So if I am on an IBR with a payment of $0 monthly (due to income and family size) at 25 years when they forgive my loan, the entire amount plus interest is going to be considered income? Let’s say I have a 20k yearly income, and my loans are at $40k… the year they forgive it will be like I made 60K (plus interest accrued) that year instead of my normal 20k?

    This is scary… I was never told this when it was offered and I want to say I am almost to my fifth year on this plan, unfortunately its the only option I have. I really hope this isn’t the case.

    • Hi Sara,

      Yes, under the current laws, any student loans forgiven will be taxable. So yes, if you have $20k in income and then $40k forgiven, it’s as if you earned $60k in income that year.

      You’re right that it is pretty alarming. We’re hopeful that the law regarding this changes to make student loan forgiveness tax free, but this hasn’t happened yet.

      Best,

      Jeffrey

      • Colin

        Jeffrey.
        Obviously, a lot can happen in 25 years. So regarding your response to Sara, If congress passes a law making student loan forgiveness tax free, say next year, or 12 years from now, it wouldn’t affect someone who will not have their loans forgiven until after 25 years, correct? In other words, Is it based on whatever the law says when your loan is completely forgiven? If that is correct, We will not know whether we will be having to pay taxes on our forgiven student loans until the time comes?
        Or is it possible that if there is a law put into place to make student loan tax free originally passed on year 10 of the IBR to year 24 of the IBR, then reversed back to the current law, would that span would be deemed tax free?
        Thanks! We appreciate your continued feedback!

  • Scott Sands

    So here’s another situation. I was a co-signer for my brother’s student loan consolidation loan. My brother paid regularly for years then died. The loan company forgave the loan then sent 1099-C forms to both my brother, the loan applicant and actual receiver of the money, plus myself, the co-signer/guarantor. I would assume my brother’s estate is obligated to report the the forgiven amount as income. However, am I, as the co-signer, also obligated to report the forgiven amount as income even though I never benefited from the loan in the first place?

    • Hi Scott,

      I’m sorry to hear about your brother.

      As far as your question, it seems unlikely to me that you’d be on the hook for paying taxes on this forgiven debt. However, I can’t be certain, and it’s really a better question for a tax professional or the IRS.

      Please let me know if you have any other questions I can help with.

      Best,

      Jeffrey
      Student Loan Hero

  • damien smith

    I have a general question. I too have student loan debt and am currently taking care of my Mom. I entered the REPAYE option, however my question is after say 25 years, will the loan balance iINCLUDING the interest be forgiven all together? Or is it only the principal and not the interest? If so that interest even after the government covers the first 3 years can be close to 150k.
    Thanks

  • Tiffany

    Hi, so I happened to suffer to high interest rate of 6.8% when I enrolled in graduate school in 2012. Now I have $225k student loan debt upon graduation, I’m considering between refinancing with either SoFi or Earnest or using REPAYE or PAYE. What are the pros and cons? Just to make sure, since REPAYE and PAYE programs are federal, I can’t refinance with a lender while on the program, right? Thank you very much for your help.

    • Hi Tiffany,

      Thanks for your question. Yes, you’re right that you cannot utilize REPAYE or PAYE if you choose to refinance your student loans.

      In terms of pros and cons, I’d recommend checking out our Cheat Sheet to learn more. You can do that at the bottom of this page: https://studentloanhero.com/start-here/

      Hope this helps. Let me know if you have other questions.

      Best,

      Jeffrey
      Student Loan Hero

  • Hi Damien,

    Thanks for your question. It’s the full balance that’s remaining after 25 years, which includes any interest that’s accrued.

    Let us know if you have any other questions!

    Best,

    Jeffrey
    Student Loan Hero

  • Aunt Arctica

    I guess my question is specific. I had my student loans forgiven due to becoming totally, permanently disabled, and unable to work at all. I am subject to a 3 year probationary period during which I have to remain unemployed and unemployable. So they said I have to pay taxes but I’m unclear when. I haven’t received a 1099, but I don’t know if I should have received one. So, do I pay the taxes this year or after 3 year probation?

    • Transit Analyzer

      I am in the same situation. You are supposed to receive a 1099 at the end of the 3-year monitoring period. What I am not sure is whether or not you would need to do a prior year tax amendment or report the income in the year you receive the 1099. I’d guess it’s the latter. Hopefully, by then, the congress will have passed the law to correct the tax situation. Maybe, it depends on who wins the elections in 2016. Let’s continue to call our congressmen/women to press this issue. The burden is just too big when you are not able to work.

  • Hi,

    According to here: http://www.studentloanborrowerassistance.org/loan-cancellation/disability-and-death/ , you’re supposed to pay the taxes in the year the loans are discharged. Specifically, they say:

    The Department says that it is required to report to the I.R.S. the discharge of any debt greater than $600 as income in the year that the loan was discharged, not at the end of the three year monitoring period. However, you may not have to pay taxes. For example, you may be able to claim insolvency status using I.R.S. Form 982. It is a good idea to consult a tax professional for more information.

    As far as not receiving a 1099, I’d recommend contacting your servicer to verify if you should have received one or not.

    I hope this helps. If you have other questions, let us know.

    Best,

    Jeffrey

  • JP

    Two Questions: If I do qualify for PAYE, can I pay extra each month to knock down the principle, and help alleviate some of the tax due at the end of the 20 or 25 years? If I could afford a standard 10 year repayment, is that a better option in the long run?

  • Maria Botinas

    When will they be looking for at this bill?

  • Hi JP,

    Yes, you can add extra payments whenever you want on any plan. If you want to pay off your loans the fastest, the standard 10-year plan works best. However, the monthly payments are simply to high for some people. So another option is to enroll in PAYE and just make extra payments from there.

    Hope this helps! If you have other questions, let me know.

    Best,

    Jeffrey

    • kimmy

      Jeffrey- So if i’m in the IBR plan, i can pay extra whenever I can to help reduce the balance right? Since I can’t handle the standard 10 year plan?

      • Hi Kimmy,

        Yes, that’s right — you can!

        Cheers,

        Jeffrey

  • Hi Maria,

    Do you mean how will the IRS know that the debt has been forgiven and that you owe them money? This will be from a 1099-C form that your lender will issue. This information is reported to the IRS, so they’ll likely compare accuracy when you file your taxes.

    Hope this helps! If you have other questions, let me know.

    Best,

    Jeffrey

  • Elizabeth Terry

    Just a comment also… If the amount of the loan forgiven exceeds the amount of assets you own you don’t actually have to pay it it’s all in the tax code crap

  • Hi Elizabeth,

    Thanks for pointing that out. I wasn’t aware of that.

    Best,

    Jeffrey

  • Emily

    I have a specific question. I just heard about this today and am currently freaking out. I am a civil service worker and qualify for the Public Service Loan Forgiveness program and i also use IBR plan. My loans are around 100K and growing everyday because my payment is too low to even touch the interest. I called my loan provider and asked what I was supposed to do and she said just be sure im working for a job that qualifies me for PSLF and ill be fine. So, what youre saying is that after my 10 years of paying for student loans im going to get hit with a tax bill for over 100K? Which will be basically my student loans all over again???

  • Ben

    Thanks for the help so far! I’m sitting on $280K in student loan currently. I’ve been on ibr for 5 years and have another 20 left. My interest rates average about 7.5% and I’m obviously downing. If my math is correct the amount forgiven at the end will be about $700K. I’m making enough that if I consolidated I could pay this thing off eventually. However, I’m currently thinking of waiting it out, hoping I can save/invest and come up with enough to pay off the tax at the end instead since the amount of tax will be just slightly less than I owe in total (Federal tax on my loan would be (274K if I add my current income to the $700K forgiven). A couple questions here. First, is my logic sound on the two options here or am I missing anything? Second, is the year I receive the forgiveness what decides what state I pay the taxes on so if I move to Washington, Florida, or Tennessee I wont pay any state tax? I’ve been running in circles with this for 5 years so far so I really appreciate your help.

  • Ann C

    Hi-
    How do they figure out the tax percentage to tax your forgiven loans after the 25 years? Is it according to the state you’re living in? Thanks

    • Hi Ann,

      The taxes are simply based on your federal tax bracket. Since we don’t know what tax rates will be in the future, it’s hard to predict.

      On the state level, I’m not sure how it will be handled. That depends on each individual state, and they likely treat forgiven debt differently.

      If there’s anything else I can answer, let me know!

      Best,

      Jeffrey

    • leonffs

      Let’s say for example when your loan is forgiven you are making 50K per year. Let’s also say that you have about 50K in outstanding student loan debt that gets forgiven. Your tax return that year would then be like you made $100K, pushing you into a higher tax bracket and owing quite a bit of money. Unless you manage to save quite a lot leading up to this, you’d most likely have to enter a monthly payment plan for your tax liability, which (surprise surprise) will also include interest over the length of the payment plan. This is why you should really consider writing your congressman/senators to support pushing through a bill like the Relief for Underwater Student Borrowers Act.

  • Hi Ben,

    Thanks for your question.

    That’s a pretty complicated question which depends on several variables. However, nothing jumps out to me as missing. Just make sure to include any pay raises in your analysis over 20 years that you may receive.

    In terms of tax on the forgiveness, I honestly have no idea how it works on the state level. I would guess that each state handles how they would tax forgiven debt differently, but I’m just not sure.

    Best of luck! If there’s anything else I can do, let me know!

    Best,

    Jeffrey

  • Amanda

    I am working with a client who is totally and permanently disabled and their student loans were discharged. The discharged amount (approx. $56,000) is now considered income and they will receive a 1099 form and be required by the IRS to pay the taxes on the amount forgiven. However, the whole reason the loans were discharged was due to the fact that they client is living off of $800 a month SSDI and cannot afford to repay. Are you familiar with any means for reducing the amount owed to the IRS for this income tax (that was not income), or a way to get it decreased or waived?

    • Hi Amanda,

      I’m not a legal expert, but others have suggested it’s possible to eliminate this liability if the individual who receives the forgiveness is insolvent.

      The IRS states: “Don’t include a canceled debt in income to the extent that you were insolvent immediately before the cancellation.”

      From here: https://www.irs.gov/pub/irs-pdf/p4681.pdf

      That’s the only possibility I know of.

      Hope this helps! If there’s anything else I can do, let me know.

      Best,

      Jeffrey

  • B Van Elsing

    Hi, I recently made a settlement on my $32,000 of student loan debt for $7,000. I know I will have to pay taxes on the $25,000 that was forgiven, But, I was wondering if that $25k has the potential to jump me up into a higher tax bracket? Or will I be taxed on the $25k at my current tax level of 15%? (No state tax in NV)
    Also, Is it noteworthy that the $25,000 exceeds my net worth?

  • Hi B,

    Thanks for your question. Yes, your $25k forgiveness may put you in a higher tax bracket. But it’s important to note that not all your income is taxed at the same rate. So only a portion of that would be potentially taxed at the higher rate. For example, all income in the $37,650 to $91,150 range is taxed at 25%. So if you make $40k, only $2,350 will be taxed at 25%. The rest will be taxed at a lower rate, which you can see here: http://taxfoundation.org/article/2016-tax-brackets

    In terms of your net worth, you may be considered insolvent. You can read more about this here: http://www.studentloanborrowerassistance.org/wp-content/uploads/2013/05/tax-talking-points.pdf

    You may also want to check with a tax professional.

    If there’s anything else I can help with, let me know.

    Best,

    Jeffrey

  • Adam

    Hi Jeffrey,

    I have student loans and I am currently in the REPAYE program. I do not have hardly any income now, but I think in a few years my income will go up to where I no longer qualify for the program. My plan is to pay off as much of these loans – through higher monthly payments than is required – before I exit the program. Are there going to be tax implications when I exit the program to a standard payment plan? Thanks!

    Adam

  • Marvin Gunning

    I have been offered student loan forgiveness based on my permanent disability. I am assuming that my tax bill will be substantial on $55,000. I am on Social Security. Since my Social Security benefit will be decreased if I make a certain amount, will the tax liability cancel out my ss benefit until the tax is paid? I have no other income and will be 65 this summer(2016).

    • Hi Marvin,

      Thanks for your question on this. To be honest, I’m really not sure. I’d try speaking with a tax professional to find out about this as I’m not one myself.

      If there’s anything else I can do to help, let me know.

      Best,

      Jeffrey

    • Katie

      I was offered student loan forgiveness because of a permanent disability. After the first year of a 3 year monitoring period I was sent a form from the loan service to file with the IRS. I found out I owed IRS $6000,00 when I was extremely low income because my student loan dismissal was considered income. . The payment arrangements they proposed were completely impossible, one IRS employee suggested I get a bank loan for the 6K which was another impossibility for someone on a very limited SSDI income and no job. I sold the small house i had for what limited equity I had, moved into an old trailer and gave them their 6K. It was a nightmare and despite filing numerous letters and documents to prove insolvency the only way I got the IRS off my back was to lose the only real asset I had

  • Tara23

    Hi, I have a very specific question regarding the 25 year loan forgiveness under IBR under the current tax laws, which I hope change for the better! I am in a situation where I have $250,000 in principal debt and do not come anywhere close to paying the interest, and so my loan has already grown almost $100,000 in interest. It is very scary to think about how high it will be when I get to year 25. I understand that both the principal and interest will be forgiven. However, I am unsure if both the principal and interest will be considered as income, or if just the principal will be considered as income. I read that cancelled debt is not considered income paying it would have been deductible. I know that student loan interest is deductible up to $2,500/year for those who make less than $60,000, and that the IRS says that “for most people” this makes all student loan interest deductible. That tells me that the intention is to make it deductible. When I get to year 25, will my several hundred thousand dollars of cancelled debt from the interest be deductible, making me responsible for taxes on my principal only (which is still a LOT to pay), or will I be taxed on the monstrous amount of the principal plus the interest?

    • Hi Tara,

      Thanks for your question. While I’m not a tax expert, it’s likely any interest that’s accrued will be capitalized and added to the principal. Whatever that total amount is is what’s supposed to be taxable.

      The student loan interest deduction only applies to student loan interest that’s actually paid. So I do not believe it would apply in this case. Additionally, the maximum deduction is only $2,500 per year. So even if it was considered for that year, it likely wouldn’t have much impact.

      In any case, you likely want to check with an accountant on this.

      I hope this answers your question. If there’s anything else I can do, let me know!

      Best,

      Jeffrey

  • Julie

    I am currently on IBR with both Direct and FFEL loans (in excess of $155,000). I enrolled in IBR in 2010, and then was advised to “refinance” as Direct Loans in 2012, which I did. I simply followed the guidance of my lender – Great Lakes. Unfortunately, it was recommended to refinance as “Special Direct” loans, not just “Direct.” Therefore my FFEL loans never changed to “Direct” loans and now do not qualify for REPAYE.

    Here is my question – if I refinance now, after 6 years of payments under IBR, will my 25 year repayment period start over from scratch? As in, the 6 years of payments already made are simply disregarded? As in, instead of paying for a total of 25 years, I’d actually make payments under one federal program or another for 31 years before any debt is discharged?

  • Hi Guys! I have to say that you guys have the most helpful content on student loans I’ve ever read. Very eye-opening. And with Jeff and other moderators answering specific questions, this is truly great work.

    Taxes are painful, but the alternative is no debt forgiveness for no taxes. Give me debt forgiveness all day long and I’ll figure out how to pay the taxes! Something can always be worked out with the government.

    Best,

    Sam

  • Frank Remkiewicz

    I am a 100% disabled veteran who had $50,000.00 in students pay as you go loans. Since I received the forgiveness since I am disabled and by law, (Veterans Adminstration regulations) unable to work would my forgiven essential be taxable?.

  • Lorri

    Any help with Parent Plus? I have over $300,000 in student loan debt because I chose to pay for my children to get their college education. Now it is downright ridiculous the amount expected to pay monthly…My children pay some, but they all have low paying jobs ( teachers, exercise science & psychology)… Any suggestions?

  • Adam

    Where are you getting your information? The IRS site says that any federal student loan that is cancelled/forgiven is done so tax-free. As does the Dept of Education site. Can you reference in the tax code where it cites the exception with Income Driven Repayment plans, please? Not trying to be difficult, but this conflicts with everything I have seen and I feel like it’s coaching people to refinance with private lenders as the relief programs may (incorrectly) have a costly penalty at the end. From the IRS, it seems that private student loans are not exempted for tax free discharge. Also, a 1099C is just a discharge of debt that is reported to the IRS and may or may not be taxable. Bankruptcy discharge is not taxable. Thanks for any clarification.

    • Hi Adam,

      Thanks for your question. Our source for this information is here: https://www.irs.gov/publications/p970/ch05.html which says: “Generally, if you are responsible for making loan payments, and the loan is canceled (forgiven), you must include the amount that was forgiven in your gross income for tax purposes.”

      If you read the Dept. of Ed’s guide to income-driven repayment plans, it states: “In addition, under current Internal Revenue Service (IRS) rules, you may be required to pay income tax on any amount that’s forgiven if you still have a remaining balance at the end of your repayment period.” (source: https://studentaid.ed.gov/sa/sites/default/files/income-driven-repayment.pdf)

      Many major news publications as well as student loan lawyers have covered this. For example, Adam Minsky of BostonStudentLoanLawyer.com writes “Under current law, loans forgiven under income-driven repayment plans like IBR and PAYE can be treated as taxable income for the borrower.” (source: http://bostonstudentloanlawyer.com/senator-introduces-bill-to-waive-taxability-of-loan-forgiveness/)

      The New York Times has covered it here: http://www.nytimes.com/2012/12/15/your-money/for-student-borrowers-a-tax-time-bomb.html

      There are exceptions to this, including Public Service Loan Forgiveness and Teacher Student Loan forgiveness.

      I hope this helps clarify your question. If you any other questions, let us know.

      Best,

      Jeffrey

      • Adam

        Thanks for the thorough response. I feel like there is some ambiguity in the language by the IRS because they say which ones are tax exempt as examples. It’s almost as if there is room for other federal loan forgiveness programs such as 20-25 years of paying on IDR. These forgiveness programs under IDRs also don’t kick in for 20-25 years – which I believe haven’t even been around for 20 years so no one has realized loan forgiveness nor been charged taxes.

        Are there cases you know of where people have ran to full term on IDR and received a 1099C due to having their loans forgiven and then had to pay taxes? Is this something advocates should be aware of and seek to have this type of discharge tax-free?

        I guess my skepticism comes from working at a private lender and was coached to overcome objection from potential borrowers who wanted to benefit from income-driven repayments to scare them into thinking they’d lose more via taxes with a forgiveness event so that they could convince the person on their economics of lowering their interest rate by 1% by refinancing to a private loan. I would hope the IRS would clarify rather than leave it open.

        • Hi Adam,

          I see your point. However, pretty much everyone and every publication I’ve seen cover this purports that the IRS does consider this type of income taxable.

          The IDR plans have not been in effect long enough yet for anyone to have gotten forgiveness from them and have received a 1099. However, the 1099 would be issued by the lender anyway and not the IRS. So the issuance of a 1099 itself wouldn’t necessarily prove the borrower owes taxes or not.

          I have heard of cases of borrowers receiving 1099s for student loans that have been discharged for other reasons.

          There have been at least a few bills proposed in Congress to eliminate this tax, but none have been signed into law so far.

          Cheers,

          Jeffrey

      • Brew

        I’m not trying to troll or be a jerk, but I just want to caution you about your sources. I clicked on your link to Pub 970 and
        1. you used a statement in the Introduction section as a source.
        2. The next paragraph explicitly states the following:

        **If your student loan is canceled, you may not have to include any amount in income. This section describes the requirements for tax-free treatment of canceled student loans.

        Qualifying Loans
        To qualify for tax-free treatment, for the cancellation of your loan, your loan must have been made by a qualified lender to assist you in attending an eligible educational institution and contain a provision that all or part of the debt will be canceled if you work:

        For a certain period of time,

        In certain professions, and

        For any of a broad class of employers.**

        SO, the fact is that SOME forgiveness options already have exceptions to the taxability of cancelled debt. Some do not.

        ALSO, borrowers/taxpayers have the option to show that just prior to the settlement, you were insolvent. This would include the student loans owed on that day. This won’t help everyone, but I would venture to guess that it would help MOST borrowers. This is a whole other big topic, but one that should always go hand in hand with a discussion about Student Loan debt cancellation and taxability of that “income”.

  • Sandy

    Hello, my mother CO-SIGNED for my daughter’s private student loan. A month and a half before my daughter was to graduate, she suddenly and unexpectedly passed away. The bank discharged the debt. That was 3 years ago. Now this week, my mom and my deceased daughter both received a 1099-c from said bank. Is my mother to be held accountable to pay taxes on the $20K they say she should show as income? The money from the loan went straight to the school and my mom never had the money/check physically in her possession nor did she benefit from the funds in any way. Is the 1099-c issued in error, as I’ve read in other articles? Or is this correct? Thank you for your assistance.

  • Sandy

    Hello, my mother CO-SIGNED for my daughter’s private student loan. A month and a half before my daughter was to graduate, she suddenly and unexpectedly passed away. The bank discharged the debt. That was 3 years ago. Now this week, my mom and my deceased daughter both received a 1099-c from said bank. Is my mother to be held accountable to pay taxes on the $20K they say she should show as income? The money from the loan went straight to the school and my mom never had the money/check physically in her possession nor did she benefit from the funds in any way. Is the 1099-c issued in error, as I’ve read in other articles? Or is this correct? Thank you for your assistance.

  • Hi Brew,

    Thanks for your comment. I see your point. However, my understanding is still that this would not apply to getting forgiveness through income-driven plans, as discussed above. As I pointed out, several other sources do indicate that forgiveness is taxable.

    You’re correct that insolvency may help some borrowers. Thanks for pointing that out. We’ve covered that here: https://studentloanhero.com/featured/student-loan-forgiveness-taxable-income/ I’ve also gone ahead and added a link to that post from this post.

    Best,

    Jeffrey

  • Rebecca Ann

    When I spoke to someone at the Dept. of Education, she advised me that only the unpaid interest on the forgiven debt will be taxable.

    • Colin

      Rebecca, this would make a BIG difference. If you use the $40,000 example the author gave, and insert the interest rate (0.675), it would then be $2,550 that would be taxed. Is this accurate – does anyone know?

  • StuckInTheMiddle

    One of my loans was cancelled due to the owner of the loan filing Ch. 11 bankruptcy. At the conclusion of the proceedings, my loan was cancelled. I then received a 1099-C form that lists the amount that was cancelled.

    I owe about 5X more in student loans than was cancelled. The only asset I have is a vehicle.

    Today I went to have my taxes done and the person doing the my taxes told me the amount cancelled would be included in income and taxed. I specifically asked about applying the insolvency exclusion and was told no, the only way to exclude the cancelled amount from income was if the loan qualifies under this rubric https://www.irs.gov/publications/p970/ch05.html for an exemption. I pulled out the information below from the link:

    “Student Loan Cancellation
    If your student loan is canceled, you may not have to include any amount in income. This section describes the requirements for tax-free treatment of canceled student loans.

    Qualifying Loans
    To qualify for tax-free treatment, for the cancellation of your loan, your loan must have been made by a qualified lender to assist you in attending an eligible educational institution and contain a provision that all or part of the debt will be canceled if you work:

    For a certain period of time,

    In certain professions, and

    For any of a broad class of employers.”

    It seems there are applying the exception and not the exclusion here: https://www.irs.gov/taxtopics/tc431.html

    “Amounts that meet the requirements for any of the following exceptions aren’t cancellation of debt income.

    EXCEPTIONS to Cancellation of Debt Income:
    Amounts canceled as gifts, bequests, devises, or inheritances
    Certain qualified student loans canceled under the loan provisions that the loans would be canceled if you work for a certain period of time in certain professions for a broad class of employers
    Amounts of canceled debt that would be deductible if you, as a cash basis taxpayer, paid it
    A qualified purchase price reduction given by the seller of property to the buyer
    Any Pay-for-Performance Success Payments that reduce the principal balance of your home mortgage under the Home Affordable Modification Program
    Amounts that meet the requirements for any of the following exclusions aren’t included in income, even though they’re cancellation of debt income.

    EXCLUSIONS from Gross Income:
    Debt canceled in a Title 11 bankruptcy case
    Debt canceled during insolvency
    Cancellation of qualified farm indebtedness
    Cancellation of qualified real property business indebtedness
    Cancellation of qualified principal residence indebtedness”

    Can my cancelled student loan be excluded from gross income due to insolvency?

  • StarDakota

    Because of compounding interest on my loans I have staggering balances. I developed a chronic disease and I am on SSI for disability. I would qualify for a disability discharge but my tax bill would be over $100,000 – because of my pension, SSI I am afraid of paying off the bill. I don’t think we would qualify for OIC but unsure of how to deal with the debt at this point.

    • purplecare

      You need to check your sources. Most pension balances do not count as assets when calculating debt forgiveness taxes. You may want to check with an accountant experienced in debt forgiveness. But it sounds to me that you will probably owe nothing.

    • purplecare

      You need to check your sources. Most pension balances do not count as assets when calculating debt forgiveness taxes. You may want to check with an accountant experienced in debt forgiveness. But it sounds to me that you will probably owe nothing.

  • purplecare

    This article is about as misleading as it gets. The “percentage” of borrowers who can claim “insolvency” is around 95%. Look, if you have not been able to pay off your student loans in 25 years, the chances that you qualify as “insolvent” are very high. Actually, the tax law does not require one to be “insolvent” in the way most of us understand insolvency: homeless, carrying a cardboard sign, begging for food and work on a street corner. Your income taxes from loan forgiveness is capped at the value of your non-exempt assets. This excludes IRA’s, 401 k’s, most pensions, your home (up to the homeowners exemption in equity), most cars and work vehicles, household furniture and appliances, and clothing. In other words, you can have millions of dollars in assets and still be exempt from any loan forgiveness taxes. Only the very rich, like those in the top 5% would need to worry about paying loan forgiveness; as they should have paid their loans anyway with all the money they have squired away in assets over the years instead of paying their student loans.

  • purplecare

    This article is about as misleading as it gets. The “percentage” of borrowers who can claim “insolvency” is around 95%. Look, if you have not been able to pay off your student loans in 25 years, the chances that you qualify as “insolvent” are very high. Actually, the tax law does not require one to be “insolvent” in the way most of us understand insolvency: homeless, carrying a cardboard sign, begging for food and work on a street corner. Your income taxes from loan forgiveness is capped at the value of your non-exempt assets. This excludes IRA’s, 401 k’s, most pensions, your home (up to the homeowners exemption in equity), most cars and work vehicles, household furniture and appliances, and clothing. In other words, you can have millions of dollars in assets and still be exempt from any loan forgiveness taxes. Only the very rich, like those in the top 5% would need to worry about paying loan forgiveness; as they should have paid their loans anyway with all the money they have squired away in assets over the years instead of paying their student loans.

  • Hi Purplecare,

    Thanks for the insights here. That is very interesting to note. Can you tell me where you got the 95% figure for insolvency so we can consider including it to improve this article?

    Thanks,

    Jeffrey