Understanding 1099 C Form for your student loan debt

Forgiving your student loans is great but when you do get your loans forgiven, the forgiven amount is viewed as an income. Learn more about the 1099 c form, tax issues once you get your loan forgiven and much more.

Updated by Chandni Agarwal on 10th November 2021

You may think it as just another useless form you receive many around tax time, but actually, it is very important. Form 1099 c is an official tax document that reflects your cancellation of debt.

After receiving a 1099 c, it implies your forgiven or discharged debt, you should report the forgiven amount on your taxes, as it can be considered as taxable income.

“The taxable income is determined by the IRS when your debt is canceled and forgiven, the ultimate idea is that you purchased goods and services but you don’t have to pay in full.  Your lender will issue a 1099 c, which details your debt cancellation. Both you taxpayer, and the IRS receives copies, not unlike W2.” According to Jessie Seaman, Esq. a managing licensed tax professional at Tax Defence Network.

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What to do if you get a form 1099 c?

You should do two things if you receive a form 1099 c, i.e you should not panic and you should ignore it.

It must be included as a part of your tax return for the year your debt was forgiven or discharged if you receive a form 1099 c.

If you failed to do so the process will be delayed and you may receive a notice from IRS stating that you owe taxes on your forgiven debt. Penalties may be charged for being late.

 Here are some steps to take if you receive a form 1099 c:

  1. Verify the amount of debt to be discharged in Box 2.(h3) Make sure you are accurate-  As mentioned above, the amount of debt discharged is only reflected in it, not how much you actually paid. So if you have borrowed a student loan of $100,000 but got forgiven $30,000, the amount of $30,000 must be mentioned in Box 2. Contact your creditor if you find any error in form 1099 c.

  2. Talk with a tax professional- Getting any debt forgiven or discharged can increase your taxable income in the majority of cases. Depending on the number of factors like where you live, how much debt you had forgiven, and your current tax bracket your amount of potential tax bill may vary.

“Canceled income can increase your tax burden as it is taxed as an ordinary income. It will also increase your total income which is enough to disqualify you from claiming any deductions and credits, which will limit your ability to decrease your tax burden.”  was explained by Michael Eckstein, a Tax Accountant at EcksteinTaxServices.com

  1. File your tax return-  You will include the amount discharged on your federal student loan when you get a form 1099 c. Any canceled debt report on form 1040 on line 21, according to IRS.

  2. Pay your tax bills- Ensure that you pay your tax bills, once you know how much is due. In case you cannot afford your tax bills, you can sign up for payment plans with IRS. It may have additional penalties and interest.

What is the 1099 c form?

First, you have to check the amount with the report of 1099 c form for how much student loan was forgiven. If the amount does not match or it’s entered wrongly, contract with the creditor, whose contact info will be provided in the form.

Even after qualifying for student loan forgiveness from an income-driven plan,  you need to pay the tax on the forgiven amount. You don’t need to pay any tax on the forgiven amount only when you received loan forgiveness through Public Service Loan Forgiveness through another loan forgiveness program related to your profession.

It may seem hard to pay the tax on the amount which you are not even able to pay even after qualifying for the loan forgiveness and discharge, but that’s the law currently. The reason is the loan you take out you need to pay back legally.

Stephan M. Brown, a tax attorney at NewPoint Law Group, said, “Although in most circumstances, forgiven debt is treated as income, there are some exceptions to this rule including bankruptcy, insolvency, and an amount canceled as a gift.”

At the time of the cancelation of debt, you can prove that you are insolvent. If your debt amount exceeds your assets then you are insolvent. According to the IRS, “Don’t include a canceled debt in income to the extent that you were insolvent immediately before the cancellation.” 

You don’t have to include your forgiven debt on your tax return if you are insolvent prior to receiving loan forgiveness.

You can use the insolvency worksheet provided by IRS, to know whether you qualify insolvent. To claim this execution you have to fill form 982.

You can be eligible for this exclusion, If you truly could not afford your debt, and be off the hook for paying taxes on your forgiven debt.

When do you pay taxes for forgiven student loan debt?

In case you cannot pay your federal student loans, there are several ways to get them forgiven. But very few of them are free from income taxes.

It is an only program that needs the applicants to work in public service or high need areas as lawyers, teachers, or medical professionals who offer tax-free assistance. It also includes Public Service Loan Forgiveness (PSLF), Teacher Loan Forgiveness and National Health Service Corps Loan Repayment Program. Student loan Forgiveness is also provided by many state programs.

Forgiveness for those affected by closed schools, permanent disability, or death, or any other forgiveness program, provide aid that will be taxed as income.

If you receive any forgiveness during your tax session, you will receive a 1099 c in the mail. 

What can I do if I can't pay the extra tax?

Student loan forgiveness is a great way to get rid of your debt, but when you can’t pay your student loan that’s the time you apply for student loan forgiveness, and most likely you won’t be able to pay your taxes on debt that was forgiven. Usually, IRS expects to receive expect to receive all the taxes at once.

You can request to pay in installment similar to paying loans with interest if you cannot afford the loan. While you make payment with IRS you won’t have many options like to lower or delay your payments as you can do in federal student loans.

You can avoid paying extra taxes by proving insolvency, instead of reporting it as a forgiven amount, it is not a solution you should count on. You have to fill the Insolvency Worksheet provided by the IRS to make it possible. 

If you have time you should be prepared for the tax burden from student loan forgiveness. It is easiest if you have long term plans that end in forgiveness, such as one of the income-driven repayment plans(IDRs).

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How to prepare for an increased tax bill

Before you have any expectations for your loan given if you have some time, following things you can do to be prepared for tax burden:

Save till you cover the taxes

If you can predict how much your debt will be forgiven then you can calculate how much you can expect to pay in taxes and you can start saving according to that and you can try to save money than actually, you have to pay.

In this way, you will be ready and maybe you end up saving more money than you needed. You can also prioritize your next savings when you have saved more money than estimated.

Minimize the taxable balance

The payments don’t usually cover the interest while you make payments in an IDR. The interest will capitalize only in certain circumstances. At the end of the IDR term, it will be forgiven along with the principal.

When your interest will be covered every month, you will pay more on your loan while you will be charged less in income taxes when you reach forgiveness. According to some experts, this strategy is not good as you pay the interest as you go, you are paying 100% of the interest.

But you will never pay 100% accrued interest if you pay the minimum amount due on the loan because the amount you pay in income taxes on it will only be a percentage of the accrued interest.

Before deciding any strategy to follow you should always consider your situation. If you pay the tax as it goes, then you will have a smaller burden, but if anytime you wish to change payment plans, that can trigger capitalization, so as much as the less interest accrued, as low as your balance will increase.

Rather if you pay less, you will not wish to switch your payment plans, you can just pay the accrued interest and the income tax on it later. This is a solid strategy to save enough money to cover the tax burden. 

Avoid capitalization

You should ensure that you recertify your payment plans on time or early each year, even if you cannot increase your payments to cover interest or even if you can. When your loan switches between repayment plans, your interest rate will be capitalized, this can only happen if you miss your recertification and your loan switches back to the standard plans.

If your interest capitalizes or your balance increases, which will increase the amount of interest that accrues going forward.


The happiness of getting a student loan forgiveness is not less than getting a bonus every month. It’s even good to get forgiveness even if it is taxable forgiveness but also, good luck — We hope you have the time to prepare for a larger tax burden and don’t get surprised by it. No matter which route you go, just make sure to know the facts and stick to a plan.