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Form 1099-C and Student Loan Cancellation of Debt: How It Works

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Student loan cancellation of debt often comes with tax consequences and a Form 1099-C. When you receive word that your student loans have been forgiven — all or in part — it can be a huge relief. However, in many cases, you might still owe taxes on the amount forgiven.

What to know about Form 1099-C and cancellation of debt

If you’ve received at least $600 in forgiveness for your student loans, you’ll be sent a Form 1099-C by your creditor. The student loan forgiveness form will include the following information:

  • The lender
  • The amount of the discharge (Box 2)
  • Interest included (Box 3)

Other details are included, but those boxes will help you determine if the information on the form is accurate. If the information is inaccurate, contact the creditor listed on the 1099-C forgiveness-of-debt form to see if you can get an amended version with the correct amount.

The amount discharged during the tax year needs to be added to your gross income if it’s taxable. Depending on the situation, this could move you up a tax bracket.

1099-C exceptions to taxing student loan forgiveness

In general, canceled debt is considered income, but there are some 1099-C exceptions. Depending on the situation, you might not need to pay taxes on the amount canceled.

Here are some situations where you might not need to worry about paying taxes on your student loan cancellation of debt:

  • Public Service Loan Forgiveness (PSLF): If you’ve met the requirements for PSLF (more on this soon) and had your loans discharged, you won’t need to pay taxes on the amount forgiven.
  • Insolvency: If you meet the definition of financial insolvency both before and after you receive your forgiveness, you can possibly avoid paying taxes on your student loan cancellation of debt. However, it makes sense to use the IRS’ insolvency worksheet and consult with a tax professional before deciding how to move forward.
  • Death or permanent disability: Another of the 1099-C exceptions is if the loan holder dies or becomes permanently disabled. In these cases, the amount canceled won’t be taxed as income.
  • Certain student loan repayment assistance programs: If you participated in certain repayment assistance programs, particularly those associated with providing health care services in underserved areas, you might not need to pay taxes on canceled student loan amounts.

Realize that some cancellations, such as the forgiveness that comes from being on an income-driven repayment plan, are still included in your taxable income. Double-check your loan forgiveness program to see if you’ll be on the hook for taxes.

Program Who’s eligible? Will you owe taxes?
Public Service Loan Forgiveness Those who have worked for the government or a qualifying nonprofit and have made 120 payments while employed there No
Revised Pay as You Earn (REPAYE) Those who still have a remaining balance after being on the plan for 20 years (undergraduates) or 25 years (graduates) Yes
Pay as You Earn (PAYE) Those who still have a remaining balance after being on the plan for 20 years Yes
Income-based repayment (IBR) Those who still have a remaining balance after being on the plan for 20 years (new borrowers on or after July 1, 2014) or 25 years (if you’re not a new borrower at that time) Yes
Income-contingent repayment (ICR) Those who still have a remaining balance after being on the plan for 25 years Yes
Teacher Loan Forgiveness Those who teach for five complete and consecutive academic years in a low-income area may be eligible to receive up to $17,500 in forgiveness No
Student loan repayment assistance Those who receive help repaying their loans as a result of participation in the National Health Service Corps Loan Repayment Program or state programs related to providing health services in underserved areas No

Debt forgiveness, tax calculators and figuring out your tax bill

There’s no debt forgiveness tax calculator, simply because the amount you’re forgiven is added to your taxable income. However, if you’re close to the next tax bracket, you could see a higher marginal tax rate than expected. It’s possible to estimate how much you might owe with your 1099-C forgiveness of debt using free tax software.

Additionally, some of your income might be reduced if you’ve made payments on your student loans in the past year. If you qualify, you could see a student loan tax deduction. A student loan interest deduction calculator can give you an idea of what to expect.

Getting a ballpark figure of what you owe ahead of time can make a lot of sense if you need to save up for your tax bill. With an idea of what you’re facing, you can make a plan to get the funds you need.

What if you can’t pay your tax bill?

Your 1099-C cancellation of student loan debt can create an unexpected situation where you can’t pay your tax bill, so it’s important to face the issue head-on. You should still file your tax return on time since the penalty for failing to file can be more severe than missing payments.

If you don’t have the money available to you immediately, there are options to make sure you pay what you owe.

  • Set up a payment plan with the IRS: If you owe less than $50,000 as an individual, you can set up a long-term payment plan The IRS will let you work out an affordable plan that works for you. There are fees and other costs associated with a payment plan.
  • Use a credit card: For those who manage to get an introductory 0% APR credit card, this can help you avoid the fees associated with an IRS payment plan. However, it’s important to have a plan to pay off the credit card before the introductory period ends to avoid paying additional interest. There might be added benefits if it’s a rewards card.
  • Get a personal loan: Depending on your credit situation, you might be able to get a personal loan with lower costs than an IRS payment plan. Shop around to see what’s available to you.
  • Offer in compromise: This process is basically debt settlement with the IRS. If you can prove that paying your full tax bill will cause financial hardship, the IRS might be willing to reduce the amount you owe so that it’s manageable. You can’t file for an offer in compromise unless you have filed your tax return, though. And if you’re rejected, you could face steep consequences.

It might be worth it to consult with a knowledgeable student loan lawyer or tax attorney for help navigating these tricky waters to reduce the stress that receiving a student loan forgiveness form can cause.


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