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Is student loan forgiveness taxable?

Written by Mark Kantrowitz | Updated March 11, 2022

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.

See also: Complete Guide to Student Loan Forgiveness 

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.

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About the author

Mark Kantrowitz is a nationally-recognized expert on student financial aid, scholarships and student loans. His mission is to deliver practical information, advice and tools to students and their families so they can make informed decisions about planning and paying for college. Mark writes extensively about student financial aid policy. He has testified before Congress and federal/state agencies about student aid on several occasions. Mark has been quoted in more than 10,000 newspaper and magazine articles. He has written for the New York Times, Wall Street Journal, Washington Post, Reuters, Huffington Post, U.S. News & World Report, Money Magazine, Bottom Line/Personal, Forbes, Newsweek and Time Magazine. He was named a Money Hero by Money Magazine. He is the author of five bestselling books about scholarships and financial aid, including How to Appeal for More College Financial Aid, Twisdoms about Paying for College, Filing the FAFSA and Secrets to Winning a Scholarship. Mark serves on the editorial board of the Journal of Student Financial Aid and the editorial advisory board of Bottom Line/Personal (a Boardroom, Inc. publication). He is also a member of the board of trustees of the Center for Excellence in Education. Mark previously served as a member of the board of directors of the National Scholarship Providers Association. Mark is currently Publisher of PrivateStudentLoans.guru, a web site that provides students with smart borrowing tips about private student loans. Mark has served previously as publisher of the Cappex.com, Edvisors, Fastweb and FinAid web sites. He has previously been employed at Just Research, the MIT Artificial Intelligence Laboratory, Bitstream Inc. and the Planning Research Corporation. Mark is President of Cerebly, Inc. (formerly MK Consulting, Inc.), a consulting firm focused on computer science, artificial intelligence, and statistical and policy analysis. Mark is ABD on a PhD in computer science from Carnegie Mellon University (CMU). He has Bachelor of Science degrees in mathematics and philosophy from MIT and a Master of Science degree in computer science from CMU. He is also an alumnus of the Research Science Institute program established by Admiral H. G. Rickover.

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