Is Student Loan Granting Taxable? It depends.


There are a variety of programs and options available for student loan borrowers in order to have some or all of their student loan debt forgiven. But these programs have complicated and sometimes confusing eligibility criteria. To make matters even more frustrating, some forms of student loan remission are taxable events while others are not.

Whenever a consumer debt is forgiven, that waived debt can be reported to the IRS as “income” earned by the borrower. This, in turn, could result in the borrower having to pay income tax on the canceled debt as if the borrower had earned the amount of the debt cancellation as income. Typically, during tax season, the lender sends the borrower a Form 1099-C for any debt canceled the previous year.

For example, if a borrower canceled a $ 10,000 student loan in January 2020, the borrower may receive a 1099-C in early 2021 that requires the borrower to report the canceled $ 10,000 debt as “income” on their tax return . If the borrower has to pay income tax on these waived debts, it could cost several thousand dollars.

But waived student loan debts are not always taxable. Here is an overview.

Public Service Lending (PSLF) is a federal student loan program that enables borrowers to cancel the balance of their federal loan after 120 “qualifying payments”. Eligible Payments are payments on direct federal student loans under an earnings-based amortization plan (or standard 10-year plan) while working full-time for a qualified public sector employer in the public or nonprofit sector. Borrowers can cancel their federal student loans within 10 years under the PSLF program. The Department of Education has confirmed that student loan issuance under the PSLF program is not taxable.

Perkins lending. Federal Perkins loans are government-backed federal loans, but they are issued by colleges and universities. They usually have low balances, low interest rates, and reasonable repayment terms. You are also entitled to a variety of job-related loan benefits, particularly for teachers and certain healthcare professionals. Like PSLF, Perkins Loan Forgiveness is not taxable.

Income-oriented repayment. Many federal student loans are eligible for income-based repayment plans such as income-based repayment (IBR) and pay-as-you-earn. These plans, while each slightly different, allow borrowers to repay their federal student loans according to a formula applied to their income. Depending on the repayment plan, borrowers can get the remaining balance of their federal student loan waived after 20 or 25 years. However, this form of loan waiver is currently treated as taxable under federal law.

Dismissal due to disability. Federal student loan borrowers are eligible for loan waiver if they are completely and permanently disabled. While disability compensation was previously taxable, this has no longer been the case since January 1, 2018. Dismissals are now tax-free events. However, the law that changed the law on taxation is expected to come into force at the end of 2025. By then, Congress would have to renew the law or make it permanent; otherwise the disability allowance would be taxable again from 2026. Note that some private student lenders may also offer disability relief on private student loans, but it may not be tax-free.

Death discharge. Like disability relief, federal student loans are issued after the borrower dies. The Eltern-PLUS loan is excusable even after the death of the child who benefited from the Eltern-PLUS loan. Like disability benefit, death benefit is tax-free from January 1, 2018 through December 1, 2025 (unless Congress renews the law or makes it permanent).

School misconduct. Based on this, federal student loan borrowers who are victims of unfair, fraudulent, or illegal school practices can apply for loan waiver. The program called Borrower Defense to Repayment is currently involved in litigation and its future is far from certain. However, the IRS recently made it clear that federal student loans made under the Borrower Defense-to-Repayment Program are not taxable. The IRS also stated that borrowers who were unable to complete their degrees due to the closure of their school will not be taxed on lending either.

Comparisons for student loans. Sometimes it is possible to pay off a student loan for less than the full balance. This option is usually only available for failed Student Loans. While federal student loan settlements are governed by fairly strict federal guidelines, private student loan settlements are perpetual and can sometimes result in significant negotiated balance reductions. However, the terminated portion of the loan after an agreement is usually taxable if it exceeds $ 600 and borrowers should expect to receive a 1099-C.

insolvency. Even in cases where student loan waiver is taxable and results in the issuance of a 1099-C, borrowers may be able to reduce or even eliminate the resulting tax burden if they can demonstrate that they were insolvent – i.e. their total debt exceeded their total assets – at the time of debt relief. Borrowers would be required to complete a bankruptcy worksheet with their tax return to prove to the IRS that they are insolvent.

Determining whether student loan remission is taxable can be a complicated task. Borrowers should seek appropriate advice – particularly from an auditor or tax professional – in order to make a final determination of taxation.

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