With the Federal tax code the way it is, there is always some confusion as to whether or not you may have to pay income taxes on a discharged student loan. Student loans can be discharged by the bank holding the loan or by the government for a variety of reasons. Some of these reasons are considered taxable and some of them are not. Let’s take a look at the different situations that can occur when a loan is discharged and the times you would be required to pay an income tax for a forgiven debt and when you would not.
The Federal Government offers discharge programs for specific job fields, such as military service, teachers, certain law school loans, and certain National Health Service Corps loans. The government has stated that you are not required to pay income taxes on a discharged student loan if your profession falls into these categories.
If your student loan was discharged because your school closed, because they were certified falsely for some reason, because of unpaid refunds, or because of either death or disability, then the Federal Government considers this type of discharge to be personal income. Because of that determination, you would be required to pay income taxes on a discharged student loan.
There are also a couple circumstances where it may or may not be required to pay income taxes on a discharged student loan. For Child Care Providers and for the discharge of some Perkins loans in exchange for public service, the Internal Revenue Service does not evaluate whether these actually qualify. If your discharged loan falls into one of these categories, you will want to consult with a professional tax counselor.
Each individual state has their own requirements when it comes to the treatment of a student loan. For instance, the State of Pennsylvania does not require you to pay income taxes on a discharged student loan or any other loan as they do not consider loan forgiveness as personal income. For what your individual state requires of a discharged student loan, you will need to go to your local state’s website and search ‘student loan discharge.’
Hopefully this has helped to answer your questions as to whether or not you will be required to pay income taxes on a discharged student loan. As with any income-related question, if you are unsure of your personal situation, it can be helpful to consult with your local professional tax counselor.