The Tax Ramifications of Student Loan Forgiveness

Though student loan forgiveness is only granted under certain special circumstances, it is important to know that if you have student loans forgiven, you will face certain tax ramifications. Most of the time, anyone who receives student loan forgiveness will have to pay income taxes on the amount forgiven. Since the debt forgiveness is not a gift, taxes must be paid. Why? In losing the obligation to pay the lender, the money you would have paid the lender is now considered as income, and is therefore taxable as such. 

When are student loans forgiven?

Student loans are rarely discharged in bankruptcy because they are a federal obligation. If you are under an extended repayment plan and have been making payments steadily for a full 25 years, not including time spent in forbearance or deferment, the remaining debt, no matter how large will be forgiven. The student loan debt may also be forgiven if the graduate decides to work for certain employers such as the military, the Peace Corps, or in a school district where a lot of the attendees are low income or special needs students. If the student becomes disabled or passes away, this is an extreme case where the debt will likely be forgiven.

How is the forgiven debt reported to the IRS?

When a debt is forgiven, it is reported to the IRS on a form 1099-C. 1099’s are used to report income that has not been taxed through employer withholding. If you receive a form 1099-C, the income must be reported on your tax return because the IRS will receive a copy as well. If you disagree with the amount of money on the form, talk to the lender, and then talk to the IRS.

What student loan forgiveness is not taxable?

Some student loans are not eligible to be included as part of your income. These debts will not be taxed as income. If you have one these student loan types, the lender will not provide the necessary forms to report the income to the IRS. If you believe the lender mistakenly sent a form for student loan debt that is not taxable, consult a tax professional or the IRS. If the student loan debt is forgiven under a bankruptcy for some reason, this does not make the forgiven debt taxable.

The information presented in this article is meant for informational purposes only. It is not meant to and it should not replace the advice of a licensed tax or legal professional. The problem with the student loan forgiveness being taxable is that for the majority of students, the extra “income” pushes them into another tax bracket, giving them a greater tax liability. This increased liability will likely make them owe the IRS at which point they will have to enter a payment agreement, have their wages garnished, or their tax returns withheld until their tax debt is satisfied. These are the same consequences those with defaulted student loans will experience. 

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