Student loan forgiveness

[CNOrange]

Hi, my student loans were forgiven in September 2023 based on years in active repayment (20-25 yrs). Does the forgiven amount (approx 50k+) become taxable income or does an exemption apply? Will there be a 1099-C noting the exemption or will the exemption have to be noted in different documentation?

[ClarissaA]

Congratulations CNOrange on your newfound freedom from student loan debt!  

Typically, student loan debt cancellation is treated as income, and a 1099-C for the cancelled balance would be issued.  There are some notable exception to this rule, and based on the information you have provided, it appears you will not need to pay federal income taxes on the discharged debt. 

Currently, under a provision of the American Rescue Plan Act (ARPA) student loans cancelled due to sufficient time in repayment under an income driven repayment (IDR) plan are being treated as tax free at the federal level through 2025.    Since you indicated that your debt was forgiven after making the appropriate number of payments, it is likely you were on an IDR, or possibly are benefiting from Public Service Loan Forgiveness.  Those who earn forgiveness of their educational debt under the Public Service Loan Forgiveness (PSLF) Program are exempted from federal taxation on that income (and there isn't an expiration date for those discharged debts.) 

Additionally, student loan debts discharged under the Total and Permanent Disability (TPD) Discharge program are also exempt from federal taxation through 2025 as a provision of the 2017 Tax Cuts and Jobs Act.  

There is a possibility that your student loan servicer will issue a 1099-C for the cancelled debt - it is easier for them to issue the document and allow you to explain to the IRS why it's an exception, than it is for them to determine who is exempt from taxes.  If you receive that document, you absolutely need to include it in your return.  You would then need to add a Form 982 to the return to report the amount that was excluded from income on the basis that it was cancelled educational debts.  

One last thing to consider - you didn't tell me which state you live in.  The states are currently split on tax treatment.  In some states, the debt cancellation would be tax free, and in others, you could owe taxes on the full amount of cancelled debt.  Currently Indiana, Mississippi, North Carolina and Wisconsin have all confirmed they will tax this type of loan cancellation. Other states are still considering the issue. 

[vrpineda]

Hello,

I understand that student loans discharged under TPD are not subject to reporting through 2025.  My question is that if my 3 year monitoring period ends after 2025, do I need to report my TPD discharge and if so, for which tax year?

I apologize if I'm not asking this in the right spot.  I see my question has been asked in the community but for some reason, Intuit won't let me view the answer.

Thank you.

[DMarkM1]

No. Assuming the loan was discharged in 2023 the discharged loan amount is not taxable for any year after.  The monitoring period is only for reinstatement of the already discharged loan.   

[vrpineda]

Sorry, yes, it was discharged based on licensed medical professional documentation in 2023. I realize that I also didn't include that Nelnet states they don't consider the loan discharged for tax purposes until after the 3 year monitoring period. I have included the wording from their website below. Does your answer still apply?

Thank you very much.

"If you qualify for a TPD discharge based on documentation from the Social Security Administration or a licensed medical professional's certification, the date you are considered to have received the discharge for tax purposes is the completion date of your three-year post-discharge monitoring period." - Nelnet/DisabilityDischarge Website

[RobertB4444]

Yes, the answer still applies.  You don't need to report this at all.

@vrpineda