Student Loan Debt Reduction

[Jill Graff]

Client received a 1099-C for $1900. The Box 5 debt description is "incentive based proncipal reduction". As a lot of financial aid folks do, if you paid on time for 48 months, the principal is reduced at the end of the student loan.

Is this taxable income? Though the taxpayer recieved an education credit, the vast majority of the qualified expenses never were included because they were greater than the ceiling amount. It seems that if there was no tax benefit, then the $1900 should not be taxable.

Any help would be appreciated.

[Brad Imsdahl]

TTB, page 14-10 under other rules for discharge of indebtedness, it says: "DOI (discharge of indebtedness) cases are included in income, with the following exceptions...Student loans. If the discharge of indebtedness was pursuant to a provision in a student loan agreement under which all or a part of the student loan is forgiven and so long as the student works for a certain period of time in certain professions for any of a broad class of employers."

You would have to check the specifics of your case to see if it falls into this category. The fact that no education credit or deduction was derived from the student loan is irrelevant.