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It isn’t unusual for college students and graduates to be in debt due to education-related borrowing. Nearly half of adults under the age of 30 took on some student loan debt in 2019, according to a Federal Reserve report , with the typical amount being between $20,000 and $24,999. As for the overall amount of student loan debt in the United States, the dollar figure is now more than a staggering $1.7 trillion.

Because of this student loan crisis, the idea of having part or all of this student loan debt forgiven would naturally sound attractive to many of these borrowers, allowing them to spend their hard-earned dollars in other ways. This post will share facts and myths about student loan forgiveness, along with information about how forgiven student loan debt can affect a person’s income tax bill and, finally, the role that the 1099-C student loan forgiveness form plays.

Here’s a high-level look at the 1099-C student loan forgiveness form. This income tax document lists how much debt, dollar-wise, was forgiven in that tax year—and the IRS will also receive a copy. Why? Some student loan debt that’s forgiven is also considered to be taxable income.

Recommended: 7 Facts You Didn’t Know About Student Loan Debt

Student Loan Forgiveness

This is a subject where plenty of facts, myths, and half-truths exist. Part of the confusion may have arisen when the Student Loan Forgiveness Act (SLFA) was introduced in Congress in 2012 to help borrowers pay down their debt.

This Act proposed an interest rate cap on student loans, along with a repayment plan that would allow borrowers to have their loan balance forgiven after ten years if the payments they made equaled 10% of their adjusted gross income.

Students who found employment in public service jobs could have their balances forgiven after five years, rather than ten. This Act, though, never made it out of committee.

In May 2020, the House of Representatives passed the HEROES Act (although it wasn’t addressed by the Senate). The Act debated in the House would allow for $10,000 in forgiveness in federal student loans and $10,000 in private student loans per student, reduced from the initial proposal that called for $30,000 in forgiveness—but then the Act was further watered down to only provide this option to students who were struggling financially.

On October 1, 2020, the House passed a modified version of this bill, but it has not yet been addressed by the Senate.

The American Rescue Plan, which passed in March 2021, did include some provisions regarding student loan forgiveness. These provisions state that all forgiven student loans will be forgiven tax-free through December 2025.

Existing Options for Federal Student Loan Forgiveness

There are some options for borrowers to receive forgiveness on federal student loans. These forgiveness options include:

•   Income-Driven Repayment Plans: The U.S. government offers four types of income-driven repayment plans where the remaining balance could be forgiven after 20 to 25 years if requirements are met. Requirements include paying designated amounts on time.
•   Public Service Loan Forgiveness: Under this program, borrowers who work for a qualifying non-profit agency, governmental organization, or public interest employers can get their loans forgiven after ten years. They must make 120 payments based on their income to qualify. The amount forgiven under this plan is not considered taxable income by the IRS.
•   Teacher Loan Forgiveness Program: Qualifying teachers, after five years of teaching full-time, can get up to $17,500 of their federal loans forgiven. To qualify for the full amount, they need to teach math or science at the secondary level, or special education at the elementary or secondary level. Otherwise, they may still qualify for $5,000 in forgiveness.
•   NURSE Corps Loan Repayment Plan: This program can pay up to 85% of eligible borrowers’ unpaid nursing school debt. To qualify, they must work for two years in a critical shortage facility or as a nursing faculty member at an accredited school. After two years, 60% of student loan debt can be forgiven. If qualifying for another year, then an additional 25% of the debt can be forgiven.
•   Indian Health Services’ Loan Repayment Program: This program will repay up to $40,000 for qualifying doctors, nurses, dentists, psychologists, and other healthcare professionals working for two years in facilities that serve American Indian or Alaskan Native communities. Contracts can continue to be renewed beyond the initial two years until the loan debt is fully paid off, and other professionals—such as environmental engineers and social workers—may qualify.
•   The National Health Service Corps: Medical, dental, and mental health professionals who work for two years in underserved areas can qualify for up to $50,000 in loan repayment forgiveness. Typically, it’s the federal loans that qualify.

There is plenty of discussions right now about forgiving student loans in additional ways, so it’s possible that forgiveness programs may be expanded under the new administration. It’s hard to predict right now.

There certainly is support for the idea of forgiving all student loans, with more than half of Americans (54%) agreeing that this debt is a “major problem” in the United States. When looking at registered voters, 58% of them say they’d support a plan that got rid of existing student loan debt—and to also make public colleges and universities, along with trade schools, tuition-free.

When it comes to private student loans, these loans can seldom be forgiven except under the direst of circumstances, such as when the borrower becomes completely disabled or dies.

Recommended: Understanding Private Student Loan Forgiveness Options

1099-C: Cancellation of Debt (Student Loans!)

When a borrower gets student loan debt forgiven, tax consequences should be investigated and, as with any tax-related question, it’s best to consult with an accountant or tax attorney.

Programs that require borrowers to serve in high-need areas or in public service can provide forgiveness of debt that’s tax-free. Current examples of tax-free forgiveness include Public Service Loan Forgiveness, Teacher Loan Forgiveness, and the National Health Service Corps Loan Repayment Program. Forgiveness under income-driven repayment plans is generally taxable.

The tax season after a borrower receives student loan forgiveness, they’ll likely receive a 1099-C form. This will list how much debt was forgiven in Box 2, so check to make sure it matches your records and then verify whether income taxes will be owed on this amount.

Some borrowers who will see tax consequences for forgiven student loan amounts may be pushed into a higher tax bracket. If this occurs, they will need to deal with a double whammy: more taxable income at a higher bracket.

In some cases, this will make it difficult for the borrower to pay the amount of income taxes owed for that year. Some may decide to put the amount on a credit card or take out a personal loan, while others negotiate with the IRS or set up a payment plan with the agency.

The Takeaway

Federal student loans come with benefits not available through private student loans, including the forgiveness programs like those offered by Public Service Loan Forgiveness or income-driven repayment plans. When federal student loans are refinanced, the borrower can’t benefit from the forgiveness programs anymore.

If you’re thinking about refinancing student loans, it may make sense to explore what’s available at SoFi. Check out this information about student loan refinancing while the ongoing relief due to COVID-19 is in effect and what can make sense (short answer: refinancing federal loans might not be the thing to do right now, but it could make sense to explore refinancing private student loans through SoFi).

SoFi offers competitive rates with no fees and, if and when the time is right, you can refinance your federal student loans with your private student loans, something that many financial institutions simply won’t do. Plus, it’s quick, easy, and convenient to apply online.

IF YOU ARE LOOKING TO REFINANCE FEDERAL STUDENT LOANS, PLEASE BE AWARE THAT THE WHITE HOUSE HAS ANNOUNCED UP TO $20,000 OF STUDENT LOAN FORGIVENESS FOR PELL GRANT RECIPIENTS AND $10,000 FOR QUALIFYING BORROWERS WHOSE STUDENT LOANS ARE FEDERALLY HELD. ADDITIONALLY, THE FEDERAL STUDENT LOAN PAYMENT PAUSE AND INTEREST HOLIDAY HAS BEEN EXTENDED TO DEC. 31, 2022. PLEASE CAREFULLY CONSIDER THESE CHANGES BEFORE REFINANCING FEDERALLY HELD LOANS WITH SOFI, SINCE THE AMOUNT OR PORTION OF YOUR FEDERAL STUDENT DEBT THAT YOU REFINANCE WILL NO LONGER QUALIFY FOR THE FEDERAL LOAN PAYMENT SUSPENSION, INTEREST WAIVER, OR ANY OTHER CURRENT OR FUTURE BENEFITS APPLICABLE TO FEDERAL LOANS. CLICK HERE FOR MORE INFORMATION.
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SoFi Student Loan Refinance
If you are a federal student loan borrower, you should consider all of your repayment opportunities including the opportunity to refinance your student loan debt at a lower APR or to extend your term to achieve a lower monthly payment. Please note that once you refinance federal student loans you will no longer be eligible for current or future flexible payment options available to federal loan borrowers, including but not limited to income-based repayment plans or extended repayment plans.