Is It True Our Forgiven Student Loan Debt is Only Taxable Up to the Point We Become Insolvent?


Dear Steve,

My husband and I did one of those awful spousal consolidations years ago. He originally borrowed about 100K and I borrowed 30K.

We have since added another 100K in Parent Plus loans. which we have consolidated and are currently on an ICRP. The balance is over 400K at this point.

We just recently re-consolidated when our son finished school. I left one of his loans out so I can re-consolidate in about 5 years to start the clock over.

We are doing the “die before our 25 years is up“, plan. My husband is 62 and I am 58. So our clock just started over.

I just read about this insolvency thing. Are you saying that if our debts are higher than our assets in 25 yrs we would not owe that tax bill?

Our house will be paid off, probably worth 250K, a little in retirement BUT that loan will be massive by then – probably a million bucks I would imagine. Again my plan was to leave this one little loan out and reconsolidate again in 5-7 years but maybe we don’t have to do that? What a mess! Thanks for any help.



Dear Tammy,

As you can imagine, the technical answer is a bit nuanced. It’s easier most of the time just to mention the insolvency exception because get ready for it, here is the full answer:

You may be taxed, as ordinary income, on the amount of the forgiven debt up to the point you become insolvent. For example, if your assets are $250,000 and you receive $1 million in forgiveness, then you could be taxed on $250,000 of the forgiveness.

The IRS says, “Normally, a taxpayer is not required to include forgiven debts in income to the extent that the taxpayer is insolvent.” – Source

The IRS also says, “The tax impact of debt forgiveness or cancellation depends on your individual facts and circumstances. Generally, if you borrow money from a commercial lender and the lender later cancels or forgives the debt, you may have to include the cancelled amount in income for tax purposes. The lender is usually required to report the amount of the canceled debt to you and the IRS on a Form 1099-C, Cancellation of Debt.” – Source

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IRS Publication 4681 has a worksheet to help with this calculation.

The publication also provides an example.

Amount of insolvency less than canceled debt. The facts are the same as in Example 1 except that Greg’s total liabilities immediately before the cancellation were $10,000 and the FMV of his total assets immediately before the cancellation was $7,000. In this case, Greg is insolvent to the extent of $3,000 ($10,000 total liabilities minus $7,000 FMV of his total assets) immediately before the cancellation. Because the amount of the canceled debt was more than the amount by which Greg was insolvent immediately before the cancellation, Greg can exclude only $3,000 of the $5,000 canceled debt from income under the insolvency exclusion.

Greg checks the box on line 1b of Form 982 and includes $3,000 on line 2. Also, Greg completes Part II to reduce his tax attributes as explained under Reduction of Tax Attributes, later. Additionally, Greg must include $2,000 of canceled debt on line 21 of his Form 1040 (unless another exclusion applies).” – Source

The problem with this situation in general is we are talking about tax code or tax law, and I am neither a tax expert nor a lawyer. In addition, the law may change greatly decades from now. No crystal ball to check on that.

It is a total mess and there are some additional tricks to push this out further. You might want to talk to a knowledge expert in person or have a chat with my good friend and debt expert Damon Day who is a pro in these areas. You can easily push this out past your expected death date and then it’s problem solved.

Yes, it is a total mess.


You are not alone. I'm here to help. There is no need to suffer in silence. We can get through this. Tomorrow can be better than today. Don't give up.

Damon Day - Pro Debt Coach

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