Student Loan Success, But Taxable Income? Plus Boo Sallie Mae :(

[hedgey]

Last year my husband was successful (yay!!) in getting one of his student loans discharged. It was $32,000, so again, YAY!

Yesterday, we received a 1099-C from the lender, and it looks like we'll have to declare it on our taxes. This is not so yay, because it really skews our taxes. My husband insists that we don't have to declare it because it's a VA benefit and therefore not taxable. I'm not so sure about that...

Also, just want to moan a little here. DH had two loans. The big one that got discharged easily, the first time with no problems, was serviced by a small lender in the midwest. Nice people answered the phone and were very helpful.

Sallie Mae services his other loan. What a different organization to work with. They have rejected his application 3 times now. First rejection was due to missing paperwork (not true!). Twice since they have claimed he was using an out of date form, even though it was the form they sent to him.

Calling them has gotten us nowhere. I have even sent them the approval letter we got from the Dept of Education about the other loan, but Sallie Mae still didn't process his application.

We'll send another application... supposedly the new one they sent him last week (took a month to mail it to him after not even notifying him that his previous application was denied).

I don't understand this. It's the Dept of Education that approves or disapproves the discharge, not the servicer. Why is Sallie Mae not forwarding the application? What's in it for them to drag this out or block it?

[broncovet]

This is an obvious question for a tax professional. I have a great tax person, but you need one to specifically address your situation which is likely totally different from mine. There may be ways to "offset" this gain, such as contributions to church, interest on your home, medical expenses, etc., etc...ask them for sure. It sounds like it would be worth the money to ask a pro because you want to pay the lowest tax, but you surely dont want to get into trouble with the IRS.

You can also call the IRS hotline..maybe they can advise. You dont have to give your name.

[meghp0405]

if a student loan is discharged, the holder has to pay the taxes on it... I've seen this before.

[Vync]

A guy I work with has run into similar problems with his Sallie Mae-backed loan.

[kymike]

I am no CPA, but it makes since to tax the principle. But are they going to tax the interest? Check I would rather keep owing on my student loans than get a big tax bill from the IRS.

[hedgey]

The fact that there's a 1099-C involved is enough for me to feel that it's a legal, declarable sort of income. I will call the IRS for guidance, though. I've called a couple of tax prep people and so far am not too confident in their ability to deal with disabled veterans issues. I don't mean the chain-store places, I called private tax prep/accountant places. One even tried to tell me that VA disability compensation was taxable income "just like Social Security". {{shudder}}

But still, I won't grumble about it if we have to pay taxes on the discharged amount. I did last night because it caught me off guard, and unless I find a tax accountant who will say Oh, yes! VA disability, I know all about that area, been working with vets for years!.... Oh, I know, I'll call the American Legion VSO. He might know who I should call. Why didn't I think of that earlier?

Yeah, Sallie Mae has not been a joy to work with. Our kid has had trouble with them as well, in trying to pay her own loans. Customer service is not something they put a lot of emphasis on. We even decided against borrowing from them years ago because they were so difficult to talk to. Our loans were transferred from the lenders we chose to work with (not uncommon, I guess) but it's aggravating that we had no say in becoming their customers at all.