Student Loan Cancellation and Settlement Taxes: What the 1099-C Really Means

Canceled student loan debt can trigger a tax bill — but not always.

If your loans were forgiven, discharged, or settled for less than you owed, the IRS may treat that amount as income. Federal law currently exempts most forgiven student loans from federal tax through December 31, 2025, but private-loan settlements and older discharges can still create taxable income.

Canceled student loan debt isn’t always taxable. If your federal loans were forgiven or discharged between 2021 and 2025, you won’t owe federal income tax. That protection comes from the American Rescue Plan Act (ARPA), which made most student loan forgiveness tax-free through December 31, 2025. Unless Congress extends that law, forgiven balances after that date will again count as taxable income.

Private student loan settlements are different. When a private lender agrees to accept less than you owe, the forgiven amount is usually treated as income. You can avoid tax only if you were insolvent at the time (your debts were greater than your assets) or if the debt was discharged in bankruptcy.

A few states don’t follow the federal exemption and may still tax forgiven student loans. Check your state’s Department of Revenue website before you file. Some of those states require filing a state-level insolvency form similar to Form 982 to claim an exclusion.

You got a 1099-C because your lender canceled or settled your student loan for less than you owed. Federal law requires the lender to report any canceled debt to the IRS because it might count as taxable income.

The form doesn’t mean you still owe money — it just documents that your loan was closed with a balance forgiven. Box 6 on the form lists an Identifiable Event Code:

• F means the debt was settled for less than the full amount.

• G means the lender stopped collection after years of nonpayment or a discharge.

The IRS gets a copy, too, which is why you’ll need to explain or exclude the amount when you file your taxes.

Canceled student loan debt is taxable when it falls outside a federal exemption. The IRS treats forgiven debt as income unless a law or exclusion says otherwise.

You’ll generally owe taxes if:

• You settled or charged off a private loan. Most private student loan settlements create taxable income unless you were insolvent or the debt was discharged in bankruptcy.

• Your federal loans were canceled before 2021 or after 2025. The current federal tax break under the American Rescue Plan Act only covers cancellations made from January 1, 2021, through December 31, 2025.

• Your state taxes forgiven debt. A few states don’t follow the federal exemption and will tax canceled student loans even if the IRS doesn’t.

Related: Private Student Loan Lawsuit Defense Guide.

Canceled student loan debt isn’t always taxable. You can avoid paying taxes if you qualify for one of three exclusions.

The ARPA Federal Tax Exemption (2021–2025)

Canceled federal student loans are tax-free through December 31, 2025 under the American Rescue Plan Act. The exemption covers Direct, FFEL, Perkins, and most other federal loans, along with some private education loans issued or guaranteed by the government. No separate form is required.

Claiming the IRS Insolvency Exclusion (Form 982)

If your total debts were greater than the value of your assets at the time the loan was canceled, you’re considered insolvent. You can exclude the forgiven amount from income by filing IRS Form 982 and using the worksheet in IRS Publication 4681 to calculate insolvency. Loans discharged in bankruptcy are also excluded from income under 26 U.S.C. § 108(a)(1)(A).

If you received a 1099-C for canceled student loan debt, you’ll need to account for it when you file your taxes.

Start by checking the amount listed on the form against your final loan or settlement records. If the figure is wrong, contact the lender for a corrected copy.

If the canceled debt is taxable, report the amount as Other Income on Schedule 1 (Form 1040), line 8z.

If it’s excluded under the federal exemption or the insolvency rule, file IRS Form 982 with your return to show why the amount isn’t taxable. Keep the 1099-C and supporting documents for at least seven years in case the IRS requests proof later.

Ignoring the form can lead to a tax notice because the IRS automatically receives the same information from your lender.

A 1099-C for canceled student loan debt is usually a one-time event. Once a lender reports the cancellation and the IRS records it, the same debt won’t be reported again in future years.

You’ll only receive another 1099-C if a different loan is later canceled, settled, or discharged. Rehabilitation, consolidation, and repayment plans don’t generate additional 1099-Cs.