1099-C and Student Loan Forgiveness: What You Need to Know

If you’re a student loan borrower who has had your loans forgiven, you may have received a 1099-C form in the mail. This form, known as the “Cancellation of Debt” form, is a tax document sent by lenders to borrowers and the IRS when a debt of $600 or more is forgiven or canceled.

In the context of 1099-c student loan forgiveness, receiving this form means that your lender has reported the amount of your forgiven debt to the IRS, and you may have to include this amount as taxable income on your tax return. However, recent changes in tax laws have temporarily changed the tax implications of student loan forgiveness

Generally, the tax code treats forgiven or canceled debt as taxable income, with some exceptions. When a borrower has debt forgiven, it is usually considered additional income earned in the previous tax year, equal to the amount of forgiven debt.

However, the tax treatment of forgiven student loan debt has been subject to temporary exemptions and inconsistencies in recent years.

The American Rescue Plan Act (ARPA) of 2021 temporarily exempted student loan forgiveness under income-driven repayment (IDR) plans from federal taxation through 2025.

Similarly, the Tax Cuts and Jobs Act (TCJA) of 2017 made forgiven student loan debt under the Total and Permanent Disability (TPD) Discharge program exempt from taxation until the end of 2025.

Despite these temporary exemptions, the current tax code has a complex patchwork of exceptions and inconsistencies regarding the tax treatment of forgiven student loan debt.

Lawmakers have proposed various solutions to address these inconsistencies, such as permanently excluding all canceled student debt from taxable income or classifying forgiven student loans as qualified scholarships. But Congress has yet to approve any of those proposals.

Under the American Rescue Plan Act, student loan debt forgiveness under all federal programs is tax-exempt from 2020 to 2025 at the federal level. This means that if your federal student loans are forgiven under the following programs during this period, you will not receive a 1099-C form, and the forgiven amount won’t count as taxable income for federal taxes:

• Public Service Loan Forgiveness Program (PSLF)

• Income-Driven Repayment (IDR) Plan forgiveness

• Teacher Loan Forgiveness

• Closed School Discharge

• Total and Permanent Disability (TPD) Discharge

In addition, if your loans are forgiven under the Biden administration’s student loan forgiveness programs before December 31, 2025, such as the recently announced IDR account adjustment, you will not receive a 1099-C form, and the forgiven amount will not be considered taxable income for federal taxes.

However, while the ARPA provides tax-exempt status for federal student loan forgiveness, state tax laws may differ.

Some states have not conformed to the federal tax treatment and may still consider forgiven student loan debt taxable income.

This means that even if you don’t receive a 1099-C form and don’t owe federal income tax on the forgiven amount, you may still have to pay state income tax on the forgiven debt.

To understand your state’s tax implications, check with your state’s tax agency or consult a tax professional. They can help you determine whether your state follows the federal tax treatment or if you may be subject to state income tax on the forgiven student loan debt.

Related: Do You Pay Taxes When You Settle Student Loan Debt?

While the American Rescue Plan Act has made federal student loan forgiveness tax-exempt at the federal level from 2020 to 2025, there are exceptions and special circumstances that borrowers should know.

Loan Forgiveness Programs with Tax-Free Forgiveness

In addition to the temporary tax-exempt status from the ARPA, several student loan forgiveness programs offer tax-free forgiveness despite the ARPA’s provisions. These programs include:

• Public Service Loan Forgiveness: If you work for a government organization or a non-profit and meet other requirements, your remaining student loan balance may be forgiven tax-free after making 120 qualifying student loan payments.

• Teacher Loan Forgiveness: If you teach full-time for five consecutive years in a low-income school or educational service agency, you may be eligible for up to $17,500 in tax-free loan forgiveness.

• Perkins Loan Cancellation: If you work in certain public service professions, such as teaching, nursing, or law enforcement, you may be eligible for tax-free cancellation of your Perkins Loans.

These programs have specific requirements and eligibility criteria. Research the details of each program and consult with your loan servicer or a financial advisor to determine if you qualify.

Insolvency and Student Loan Forgiveness

In some cases, even if your student loan forgiveness is not covered by the ARPA’s tax-exempt status or a tax-free forgiveness program, you may still exclude the forgiven amount from your taxable income if you were insolvent when the debt was forgiven.

You are considered insolvent if your total liabilities exceed your total assets. If you can prove that you were insolvent right before your student loans were forgiven, you may exclude some or all of the forgiven amount from your taxable income.

To claim insolvency, complete Form 982, “Reduction of Tax Attributes Due to Discharge of Indebtedness,” and attach it to your tax return.

Tax Treatment of Forgiven Student Loans After 2025

As mentioned earlier, the ARPA’s tax-exempt status for federal student loan forgiveness is temporary and applies only to loans forgiven between January 1, 2020, and December 31, 2025.

But what if your loans are forgiven after this period?

In that case, you may have to report the forgiven amount as taxable income on your federal tax return unless another exemption or exclusion applies.

If your student loans are forgiven between 2020 and 2025, you won’t need to report the forgiven amount on your federal income tax return.

But as mentioned earlier, some states may not conform to the federal tax treatment and could still consider the forgiven student loan debt as taxable income.

Review your state’s tax laws or consult a tax professional to determine your state income tax obligations.

Do Borrowers Need to Report Student Loan Forgiveness on Their Taxes?

You do not need to report student loan forgiveness as income on your federal tax return. This is because the American Rescue Plan Act makes all student loan forgiveness tax-exempt at the federal level from 2020 to 2025.

But there are a few exceptions to this rule:

• If your student loans were forgiven before 2020 or will be forgiven after 2025, you may need to report the forgiven amount as income on your tax return.

• If your state does not conform to the federal tax treatment of student loan forgiveness, you may still need to report the forgiven amount as income on your state tax return.

How to Report Form 1099-C Information on Tax Returns

If you receive a 1099-C tax form for forgiven student loans that are not eligible for tax-exempt status, you’ll need to report the information on your tax return. Here’s how:

1. Report the amount of canceled debt from Box 2 of the 1099-C form on Line 8 of Schedule 1 (Form 1040), “Other Income.”

2. If you qualify for an exclusion or exception, such as insolvency, complete Form 982, and attach it to your tax return.

3. Consult with a tax professional or use tax preparation software to make sure you’re reporting the information correctly and taking advantage of any exclusions or exceptions.

Remember that if your student loans were forgiven under a program covered by the ARPA’s tax-exempt status between 2020 and 2025, you shouldn’t receive a 1099-C form, and you won’t need to report the forgiven amount on your federal tax return.

Keeping Records and Seeking Professional Advice

To ensure accurate tax reporting and be prepared for future audits or discrepancies, it’s important to keep detailed records of your student loan forgiveness, including any documentation related to the forgiveness program and your eligibility.

If you have questions about your specific situation or need help navigating your tax liability and the implications of student loan forgiveness, consult a tax professional or one of our student loan lawyers.

They can provide personalized guidance based on your circumstances and help you make informed decisions about your student loans and taxes.

Understanding the tax implications of student loan forgiveness and 1099-C forms is important for borrowers navigating their financial futures. You can make smart decisions and avoid unexpected tax burdens by staying informed about the latest developments in student loan legislation and tax code changes.

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