Is student loan forgiveness taxable?

June 18, 2018

Under current law, some types of student loan forgiveness and discharge are taxable and some types are tax-free.

The Internal Revenue Code of 1986 treats the cancellation of debt as taxable income to the borrower per 26 USC 61(a)(12). The cancelled debt will be reported on IRS Form 1099-C (instructions) as income if it exceeds $600.

Tax-free student loan forgiveness and discharge

There are, however, a few exceptions for student loan forgiveness and discharge.

Student loan forgiveness for working in certain occupations for a period of time is tax-free, per 26 USC 108(f)(1). This includes Public Service Loan Forgiveness, Teacher Loan Forgiveness and various loan forgiveness programs for nurses, doctors, veterinarians and attorneys.
Loan forgiveness programs established by the Public Health Service Act are tax-free per 42 USC 254L-1 and 42 USC 254Q-1.
Death and disability discharges are tax-free from 2018 through 2025, inclusive, because of the Tax Cuts and Jobs Act of 2017 (P.L. 115-97).
Closed school discharges are tax-free per 20 USC 1087(c)(4) and 20 USC 1087dd(g)(4).
False certification discharges and unpaid refund discharges are tax-free, per 20 USC 1087(c)

Taxable student loan forgiveness and discharge

The cancellation of the remaining debt after 20 or 25 years in repayment in an income-driven repayment plan is considered taxable income to the borrower under current law. However, it is likely that such borrowers are insolvent, with total debts exceeding total assets.

If a borrower is insolvent, the IRS may exclude all or part of cancelled debt from income. Borrowers who are insolvent should read IRS Publication 4681 and file IRS Form 982.

If a borrower is not insolvent, the borrower may be able to negotiate an offer in compromise with the IRS by filing IRS Form 656. Otherwise, taxpayers can request a payment plan of up to six years by filing IRS Form 9465.

References

A 2008 letter from Eric Solomon, then Assistant Secretary for Tax Policy, U.S. Department of the Treasury, summarizes the taxability of various forms of loan forgiveness.