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Student Loan Cancellation Is Taxable Income

Written by Gary North on July 25, 2012

Sometimes a judge will decide to cancel a student’s debt. This is lagal for hardship cases.

What students do not understand is this: the IRS regarded a canceled debt as taxable income.

This young woman went on total disability. It was a legitimate cause. She had $91,000 in student debts. Now she owes the IRS $26,000 and the state of New Jersey $5,000.

She might have owed more to the IRS if she had not worked in a field that got legitimate debt deferrals.

She has had most of her small intestine removed. She had a pulmonary embolism. Se needs 12-hour-a day IV feeding. Tough luck, but she still owes taxes.

No one told her this was taxable income.

There is a form for this: 1099-C.

There is no tax break for disability. “In fact, the Department of the Treasury has specifically stated that student loans cancelled due to the Death and Disability Discharge (Section 437(a) of the Higher Education Act of 1965) are taxable.”

She tried calling the IRS for assistance. The first time she called, she says the IRS representative hung up on her. The second time, she says she waited on hold for over an hour and was then told to call back after she filed her tax return. She claims that ultimately she was warned that if she couldn’t pay the amount due, the IRS would put a tax lien on her house and report her to the credit reporting agencies. (We’ve reached out to the IRS a number of times on this and other issues relating to the 1099-C, but to date haven’t gotten a response.)

She is not alone.

Once entrapped by student debt, there is no escape.

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27 thoughts on “Student Loan Cancellation Is Taxable Income

  1. I guess sometimes that higher education that obama wants everyone to have is just not all that affordable or worth it.

  2. The Obama cronies and friends like bill ayers do NOT want anyone to excel. They want a china style country where the government will send you to school IF they want you to go. You will have to be higher up in the Party or 'test out' for certain aptitudes. Until then they will do everything they can to harass the citizens and bankrupt the country. Get used to it until he is voted out.

  3. Treating any canceled debt as income is insanity. Usually, a debt is canceled either due to a hardship case, such as death or disability, in the case of student loans, agreeing to work in certain fields or parts of the country for specified amount of time, or, simply by agreement.

    Canceled debt by any sane measure isn't income, and in the case of hardships, the debt is canceled because the debtor isn't able to pay the loan for whatever reason.

    This is another bad law written by stupid people that needs to be changed. The best way to change this, and most other tax laws is to scrap the entire tax code and start again, and then…dare I say it, pass a federal law that would forbid this practice amongst the states.

  4. Any forgiveness of debt is considered income except for a few cases where a mortgage on a primary residence is knocked down. In many cases, it puts the the debtor, who thought he was getting relief, into the highest tax bracket.

    What's really aggravating is that the IRS allows only a limited writeoff on the discounted property over a period of 20 years while the tax due on the debt forgiveness 'income' is due now. They're leeches.

  5. Magnolia says:

    Biblically, when a debt is canceled it's completely forgiven with no other requirement. Then again, our Government operations are less then biblical….

  6. the irs in and of itself is just that of itself, for itself. dealing over the phone with the irs is iffy at best. perhaps, instead of cancelling a loan, it may be better to file bankruptcy. there is personal and professional bankruptcy. with professional you get to keep your personal property i.e. the house.
    consider this: declare re-instatement of the said loan. make payments for a year, then claim professional bankruptcy. there ought to be an attorney that can and will handle such a case. you have nothing to lose at this point.

  7. How does anyone accumulate $91,000 of college loan debt??? Why would the U.S. government let anyone accumulate $91,000 of college loan debt??? A more sane way of earning a college degree is to get a college loan for one's bachelor's degree, then get a job, then make monthly payments until it is paid in full like you promised you would do (loan contract). When one decides to work on a master's degree, he/she should finance the second degree from his/her monthly income from one's pay check and/or savings. Also, live at home and go to a community or junior college for one's associate degree to hold costs down.

  8. What doesn't the Constitutional Republic tax? Most people don't realize it, but this boils down to which god you choose to serve.

    "[Biblical government, based upon Yahweh's perfect law and altogether righteous judgments (Psalm 19:7-9) is set up to] operate on a mere 1/2 shekel head tax and a 13.3 percent direct tax (and from only citizens with an increase, at that)? Today’s unbiblical, constitutional federal behemoth cannot be maintained on such taxes. This is reason enough to replace America’s constitutional government with Yahweh’s limited, unobtrusive, and noninvasive government, which is easily maintained by His equitable tax system…. A flat increase tax and fixed poll tax are due to the God Yahweh. A graduated income tax is due to the god WE THE PEOPLE. Choose carefully your god and the law by which you wish to live."

    For more, see Chapter 25 "Amendment 16: Graduated Income Tax vs. Flat Increase Tax" of "Bible Law vs. the United States Constitution: The Christian Perspective." Click on my name, go to our Online Book Page, click on top entry, and scroll down to Chapter 25.

  9. Never borrow money to go to collage. You will never be able to pay back due to the fact that 90% of the ones that graduate they don't ever enter the field they studied for and never gain the income to pay back and support a family and themselves.
    this educational cost are out of reach for most average student.
    You really don't need it. There a ton of ones who graduated from high school making a lot of money and those who dropped out have succeeded well in life.

  10. Kitty Litter says:

    No, she does not owe any taxes….do the research …OMG…I wish people would think and act for themselves! I am a high school teacher…retired..and I haven't paid taxes in years…just pay my city, county taxes… People, please, please do the research…and know the IRS is not a legal, viable entity! I am serious here…. None of you need to pay for wars, imperialistic military…just work on how to stop this heinous mess we are in…Do not comply, do not buy, do not fly…peaceful noncompliance to this tyranny…

  11. toosmarttovoteGOP says:

    You DO realize that this came from the shrub's administration, right?

  12. Bill McCroskey says:

    Income tax liabilty may apply to other 'debt cancellations' besides student loans depending on many conditions. Educate yourself to this, as many restructuring or debt reduction actions may carry taxable consequences.

  13. Soooo… What could have been is taxable? Is this an element of "projected income" that taxpayers pay when they calculate their income quarterly? Single people are now going to be treated as they do corporations?

    Somewhere in here I smell a big, fat rat…

    The American Tax structure needs to be restructured. In the process, maybe they can replace the Infernal Revenue Service (IRS) with something "Fair."

  14. Bow out. Do not volunteer. Just where do you think it is written that and individual owes income tax? Joe Bannister could not find it, other have tried as well. No one has found it. So why do you "volunteer?"

  15. Soooo… What could have been is treated as taxable?



  17. How can you think this is not income? Someone (the bank) PAID for the education she chose to get, and was never paid back. This means she made the choice to spend the money, and due to unfortunate circumstances (not the fault of the bank, or the government) she never paid it back. Unfortunately, that's income. It's sad that she has had to deal with the problems that came her way, but does not change the fact that she spent money she never had. The result is she had that much income. Many people have difficult circumstances arise, but still have to pay taxes on the income they receive, whether from work or other sources. Contrary to your statement, canceled debt IS income. The person received the benefit of what they chose to spend money on, but never paid for it with their own funds. That's clearly income. Your aversion to paying taxes in any fashion seems to make you think you are not only supposed to receive all the benefits our society provides through government (highways, police and fire, militayr protection……) for free, but now somebody else is also supposed to pay fro your education as well.

  18. Texas Chris says:

    You DO realize there is no difference between the two, right?

  19. Texas Chris says:

    When income is taxed, a form of slavery, we can safely end all logical and reasonable thought on what constitutiones "taxable income". The argument is over. You are a slave.

  20. Texas Chris says:

    The Us Government does not recognize debt as a negative thing. Why would they want to limit OUR debt?

  21. So….. since it from the Bush admin…….why didn't Obama do anything about it? Oh yeah….Obama agrees with it. 🙂

  22. You DO realize that the Bush administration didn't eliminate the federal guaranteed loan program and replace it with direct loans administered by the Department of Education and funded through the U.S. Treasury, right?

  23. It's very easy in today's world. Doctors often owe $250,000 or more in student loans.

  24. The exception being the 24% who are STEM students.

  25. It wasn't "what could have been", she spent the money.

  26. When credit card debt is cancelled, for any reason, such as proof that the charges were made through Identity Theft, the write off is taxable and you will hear about it. This includes all of the "interest charges to date", money that you did not use or ever would. The IRS gets their share. Beware of Debt Consolidation businesses, they get theoir fees as well as the IRS gets taxes on the savings.

  27. Brian Lary says:

    Since she was issued a 1099-C(cancellation of debt)that is considered income but depending on her asset to liability circumstances she could claim insolvency and not have to pay any tax whatsoever. I am a tax accountant and do this all the time.