Will a 1099-C for Student Loan Settlement Increase My Income? – Gwen


Dear Steve,

I am a co-signer on a Sallie Mae student loan for my daughter in the amount of $31k, which has changed hands twice now, Navient, and now another company. They have agreed to settle for $10k, my daughter hasn’t made any “minimal” payments for months now. I want to get rid of this debt as a co-signer. I have assets, my daughter does not. She is a stay at home mom with 3 children, and her husband works making an annual salary of about $45k.

My question is, If we “gift” her the money to settle the loan, the holder of the loan will most likely send a 1099 for the difference of about $21k. That is a lot of money to claim as “income”. Since the loan is in her name the 1099 would come to her correct? If they have to claim that money, it is going to affect their tax status, it is going to affect their health insurance (which is based on their income). It could really throw things off badly. They have 3 little ones (my grandbabies) to care for and they struggle from pay check to pay check. Is there a way not to get a 1099, or at least not have to claim that as “income”?



Dear Gwen,

Sounds like a smart strategy to dispose of the debt. However, you will want to make 100 percent clear and certain this is for a full settlement for both the borrower and co-signer. I’ve seen private student loan lenders do just co-signer settlement without letting the borrower off the hook.

Yes, the borrower would get a 1099-C or at least should. However, you should read IRS Form 982 is Your Friend if You Got a 1099-C. This will explain that the tax liability, if any, exists only up to the point where they become insolvent.

I discussed your issue with Jim Buttonnow from H&R Block. He’s a real tax professional. Jim said, “The forgiven debt income may be considered for benefits qualification, depending on the benefit. For the Affordable Care Act coverage with premium tax credit assistance, if the 1099-C income is included in income, it counts toward modified AGI for premium tax credit assistance calculations.”

So while the answer if not clear cut, the reality is depending on the benefit, the forgiven debt may impact eligible benefits in the year the debt was forgiven.

So the 1099-C is issued retroactively. A debt forgiven in 2015 would result in a 2015 1099-C being issued in 2016 for 2015 taxes.

Some benefits or programs allow you to submit alternative documentation instead of tax forms so if the benefit question was what was your income in the last month or in 2016, then in my opinion, the 1099-C income would not apply since it happened in the previous year.

Steve Rhode
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This article by Steve Rhode first appeared on Get Out of Debt Guy and was distributed by the Personal Finance Syndication Network.