Student Loan Disability Forgiveness, Credit Rating, and Taxes

[Kenngo1969]

I just received a notification from NELNET, the U.S. Federal Government's Disability Loan Forgiveness Administrator, that the U.S. Social Security Administration has notified NELNET that I am eligible, under SSA rules, for a total and permanent disability discharge of my remaining outstanding loans.  My questions:  

• Under what circumstances does loan forgiveness count as income for tax purposes?  I think it would be pretty stupid*, on the one hand, for the federal government to say (essentially), "We have decided that, due to your disability, you cannot repay the loans you owe," yet, on the other hand, for a different arm of that very same federal government to say, "You know those loans we just forgave?  They count as income.  You owe us $X,XXX in taxes."  Well, Duh!   If I cannot afford to repay the loans, what makes you think I can afford to pay taxes on the forgiven amount?  *Not to say that the federal government doesn't do stupid things all the time.
• What effect will having loans forgiven have on my credit rating?  Is it like declaring bankruptcy (even though, as I was simply minding my own business, the government reached out to me rather than vice-versa)?

 

[Calm]

No personal knowledge, just googled…you may have done that already.  Perhaps consulting a tax expert would be wise?

https://studentaid.gov/manage-loans/forgiveness-cancellation/disability-discharge

https://disabilitydischarge.com

[Kenngo1969]

12 hours ago, Calm said:

No personal knowledge, just googled…you may have done that already.  Perhaps consulting a tax expert would be wise?

https://studentaid.gov/manage-loans/forgiveness-cancellation/disability-discharge

https://disabilitydischarge.com

Thanks.  @mfbukowski Mark?  (Yes, shamelessly, I'm soliciting free advice! )

[mfbukowski]

6 hours ago, Kenngo1969 said:

Thanks.  @mfbukowski Mark?  (Yes, shamelessly, I'm soliciting free advice! )

I'm not a tax guy, just a real estate guy and financial planner. I just know about taxes in that area. I know investment stuff, not student loans

🤔

[Robert F. Smith]

On 11/2/2021 at 5:02 AM, Kenngo1969 said:

I just received a notification from NELNET, the U.S. Federal Government's Disability Loan Forgiveness Administrator, that the U.S. Social Security Administration has notified NELNET that I am eligible, under SSA rules, for a total and permanent disability discharge of my remaining outstanding loans.  My questions:  

• Under what circumstances does loan forgiveness count as income for tax purposes?  I think it would be pretty stupid*, on the one hand, for the federal government to say (essentially), "We have decided that, due to your disability, you cannot repay the loans you owe," yet, on the other hand, for a different arm of that very same federal government to say, "You know those loans we just forgave?  They count as income.  You owe us $X,XXX in taxes."  Well, Duh!   If I cannot afford to repay the loans, what makes you think I can afford to pay taxes on the forgiven amount?  *Not to say that the federal government doesn't do stupid things all the time.
• What effect will having loans forgiven have on my credit rating?  Is it like declaring bankruptcy (even though, as I was simply minding my own business, the government reached out to me rather than vice-versa)?

Probably a scam designed to get your personal info so that they can empty whatever accounts you have.  IRS scammers use fake emails to do that all the time.

Edited November 3, 2021 by Robert F. Smith

[mfbukowski]

15 minutes ago, Robert F. Smith said:

Probably as scam designed to get your personal info so that they can empty whatever accounts you have.  IRS scammers use fake emails to do that all the time.

I agree, that website looks fishy to me too.

[mfbukowski]

On 11/2/2021 at 4:02 AM, Kenngo1969 said:

Is it like declaring bankruptcy (even though, as I was simply minding my own business, the government reached out to me rather than vice-versa)?

This never happens imo, even though it claims to be a government site

That website looks very fishy to me too.

Edited November 3, 2021 by mfbukowski

[Calm]

Quote

If Nelnet is contacting you about student loans, then it is probably your servicer. Even so, check and verify your student loan servicer on the Federal Student Aid website to gain peace of mind that these communications from Nelnet are legit.

https://www.thebalance.com › nelnet...

 

 

[Kenngo1969]

Thanks for the scam alerts, guys.

To clarify, the aforementioned communication from Nelnet came in an old-fashioned, ink-and-paper, United-States-Postal-Service delivered letter.

[mfbukowski]

2 hours ago, Kenngo1969 said:

Thanks for the scam alerts, guys.

To clarify, the aforementioned communication from Nelnet came in an old-fashioned, ink-and-paper, United-States-Postal-Service delivered letter.

So crooks don't use snailmaiI?

[Kenngo1969]

4 hours ago, Kenngo1969 said:

Thanks for the scam alerts, guys.

To clarify, the aforementioned communication from Nelnet came in an old-fashioned, ink-and-paper, United-States-Postal-Service delivered letter.

 

2 hours ago, mfbukowski said:

So crooks don't use snailmaiI?

I trust that this is legitimate.  If you wish, you're free to think me a fool for doing so.  I don't know what else to say.  

[mfbukowski]

1 hour ago, Kenngo1969 said:

6 hours ago, Kenngo1969 said:

Thanks for the scam alerts, guys.

To clarify, the aforementioned communication from Nelnet came in an old-fashioned, ink-and-paper, United-States-Postal-Service delivered letter.

Expand  

 

4 hours ago, mfbukowski said:

So crooks don't use snailmaiI?

I trust that this is legitimate.  If you wish, you're free to think me a fool for doing so.  I don't know what else to say.  

No, I never meant that at all!  I respect you very much.

As we know in our church, always follow your "gut" !

[halconero]

I'm not an American tax expert, but in Canada loan forgiveness is not considered income. You're crossing off a line item in the expense column of your budget, essentially.

As for your credit rating, it can drop, unfortunately, but not drastically. Your credit rating is based off a bunch of stuff, but one is the total credit available/loaned to you, your payments on that loan, and your total credit load. Those three are going away, but it's not a bad reason to see your credit rating drop.

*If* you're good with credit, paying your full balance each month, and not going into debt, a good way to rebuild your credit is just to accept any pre-approved credit card offers you get. When you get the card, set up a recurring order on Amazon for a pack of gum once a month, set your bank up to pay the credit card for that amount, and then stick the card in a drawer. I have about 6 credit cards sitting in drawers that either pay my iCloud ($1.35/month), gum ($10.00/month), and other items, and have a credit rating in the high 800s (out of 900).

[Kenngo1969]

18 hours ago, halconero said:

... *If* you're good with credit, paying your full balance each month, and not going into debt, a good way to rebuild your credit is just to accept any pre-approved credit card offers you get. When you get the card, set up a recurring order on Amazon for a pack of gum once a month, set your bank up to pay the credit card for that amount, and then stick the card in a drawer. I have about 6 credit cards sitting in drawers that either pay my iCloud ($1.35/month), gum ($10.00/month), and other items, and have a credit rating in the high 800s (out of 900).

That's an interesting suggestion ... and I'll never run out of gum!

Thanks!

[mfbukowski]

18 hours ago, halconero said:

If* you're good with credit, paying your full balance each month, and not going into debt, a good way to rebuild your credit is just to accept any pre-approved credit card offers you get. When you get the card, set up a recurring order on Amazon for a pack of gum once a month, set your bank up to pay the credit card for that amount, and then stick the card in a drawer. I have about 6 credit cards sitting in drawers that either pay my iCloud ($1.35/month), gum ($10.00/month), and other items, and have a credit rating in the high 800s (out of 900).

Yep.

That works.

But here you CAN get hit for debt forgiveness counting as income, but I don't know the rules. 

You gotta have a tax guy unless your return is very simple.

Edited November 5, 2021 by mfbukowski

[Danzo]

Internal Revenue Code 108 Generally deals with income exclusions from discharge of indebtedness income.

Most likely you would qualify for the debt forgiveness to be non taxable due to the insolvency exclusion

to claim that exemption fill out form 982 (see instructions here)

Don't forget to put it on your tax return even if you feel it meets the exclusion, especially if you receive form 1099-C.  Otherwise you might have a new pen pal named IRS.

Edited November 5, 2021 by Danzo

[Danzo]

18 hours ago, halconero said:

I'm not an American tax expert, but in Canada loan forgiveness is not considered income. You're crossing off a line item in the expense column of your budget, essentially.

As for your credit rating, it can drop, unfortunately, but not drastically. Your credit rating is based off a bunch of stuff, but one is the total credit available/loaned to you, your payments on that loan, and your total credit load. Those three are going away, but it's not a bad reason to see your credit rating drop.

*If* you're good with credit, paying your full balance each month, and not going into debt, a good way to rebuild your credit is just to accept any pre-approved credit card offers you get. When you get the card, set up a recurring order on Amazon for a pack of gum once a month, set your bank up to pay the credit card for that amount, and then stick the card in a drawer. I have about 6 credit cards sitting in drawers that either pay my iCloud ($1.35/month), gum ($10.00/month), and other items, and have a credit rating in the high 800s (out of 900).

So in canada, I can get a loan, default on it, keep the money I borrowed and not pay any taxes on it?

Sweet!

 

[Kenngo1969]

3 hours ago, Danzo said:

Internal Revenue Code 108 Generally deals with income exclusions from discharge of indebtedness income.

Most likely you would qualify for the debt forgiveness to be non taxable due to the insolvency exclusion

to claim that exemption fill out form 982 (see instructions here)

Don't forget to put it on your tax return even if you feel it meets the exclusion, especially if you receive form 1099-C.  Otherwise you might have a new pen pal named IRS.

Thank you, Danzo.  (And yes, absolutely, I am a complete tax idiot.  I studiously avoided taking any classes having anything to do with tax in law school. )

[Kenngo1969]

On 11/3/2021 at 1:06 PM, Robert F. Smith said:

Probably a scam designed to get your personal info so that they can empty whatever accounts you have.  IRS scammers use fake emails to do that all the time.

 

On 11/3/2021 at 1:22 PM, mfbukowski said:

I agree, that website looks fishy to me too.

Okay, for those of you who think I'm not smart enough to know when I'm getting taken, I called both Nelnet AND my lender, both of whom confirmed the correspondence for me.  So, if this is a scam, it's the absolute BEST scam that ever has been perpetrated on anyone, anywhere.  If it's a scam, amazingly, we've got a conspiracy between Nelnet, my lender, and some unknown third party or parties, since it's definitely not in the interest of either of the first two parties, or of both of them, to tell me that my loans are being forgiven or written off. These guys are goooooood.

  

Even the smallest possible conspiracy, that between a mere two people, tends, eventually, to collapse under its own weight, yet, we've got much, much more than that here.  

Edited November 7, 2021 by Kenngo1969

[mfbukowski]

On 11/5/2021 at 6:10 PM, Kenngo1969 said:

Thank you, Danzo.  (And yes, absolutely, I am a complete tax idiot.  I studiously avoided taking any classes having anything to do with tax in law school. )

Actually it can be pretty creative, combining the strategies.

[The Nehor]

https://www.irs.gov/taxtopics/tc431

EXCEPTIONS to Cancellation of Debt Income:

• Amounts canceled as gifts, bequests, devises, or inheritances
• Certain qualified student loans canceled under the loan provisions that the loans would be canceled if you work for a certain period of time in certain professions for a broad class of employers
• Certain other education loan repayment or loan forgiveness programs to help provide health services in certain areas.
• Amounts of canceled debt that would be deductible if you, as a cash basis taxpayer, paid it
• A qualified purchase price reduction given by the seller of property to the buyer
• Amounts from student loans discharged on the account of death or total and permanent disability of the student.

I am guessing it is the last one considering how difficult it is to get student loans discharged in general in the US.

[halconero]

On 11/5/2021 at 3:33 PM, Danzo said:

So in canada, I can get a loan, default on it, keep the money I borrowed and not pay any taxes on it?

Sweet!

 

No. Like the Office scene, you cannot just declare bankruptcy.