Green Bay, WI asked in Tax Law for Wisconsin

Q: I need advice from a tax attorney

Tax returns offset for student loans that have been discharged

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2 Lawyer Answers
Andrew M Steiger
Andrew M Steiger
  • Tax Law Lawyer
  • St. Clair Shores, MI

A: The question may require some clarification. Did you receive a 1099 related to cancelled student loans that you now have to include in income on your 1040? Or are your refunds used /taken by the lenders to offset the cancelled student loans? Cancellation of debt income is often ignored or not considered by students until an IRS Notice appears in the mail. The law related to inclusion of these loans was changed as of 2018 so you may qualify for an exclusion depending on your circumstances.

Bruce Alexander Minnick agrees with this answer

A: Thanks for providing this great teaching opportunity: Many people like you have the mistaken belief that when lenders "charge off" their student loans (or any other kind of loans) the borrower gets off the financial hook and does not have to repay the loans; that is not true. This potential problem gets worse when the lender is the government, or when the loans are guaranteed by the government, such as most student loans are.

Because the default rate on federally guaranteed student loans is so high, Uncle Sam is hard at work collecting bad student loans; and one way (the best way) they can do that is to grab your IRS tax refunds and use them to offset the defaulted student loans. (Note: There are legal ways to reduce your obligation to Uncle Sam; however, this forum is not the place to dispense specific legal advice. Contact a lawyer.)

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