How is interest accounted for when it comes to student loan forgiveness?

by Carlo J. Silvesti, CPA | Feb 13, 2019
askacpaicon

I settled a loan I took out over 10 years ago (it was a private student loan). While the loan itself was probably only about $4,000, by the time the interest rates got a hold of it the debt ballooned up to $14,000. I read this on the IRS site: "If you use the cash method of accounting, you don't realize income from the cancellation of debt if the payment of the debt would have been a deductible expense." Now, paying student loan interest each year in the past on my other loans has been a deductible expense for the interest itself, but not on the original amount. Should I consider only the original amount of the loan the "income," and that the interest which would normally be deductible would not be included in this? Or am I completely misunderstanding the whole thing?

On receiving your 1099-C from the loan forgiveness, box 2 represents both the debt and interest forgiven. Box 3 shows the amount of interest forgiven. If you would have been able to deduct it, you should be able to deduct it from the forgiveness. However, if the amount you would have deducted would have exceed the $2,500 limit, then it is taxable.

In addition, you mention that it was a “private student loan.” Is it a true student loan? If so, it would in my opinion qualify. If not, then it is not a qualified student loan, and the interest is taxable.

Also, if your 1099-C has no number in box 3, you need to contact the lender.

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Carlo J. Silvesti, CPA, is an assistant professor of accounting at Gwynedd Mercy University in Gwynedd Valley, Pa.

Disclaimer
The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
Ask a CPA

Search the most frequently asked finance and accounting questions and read the responses from PICPA members. Always consult a CPA before taking action.

Search