Question

Mike is a college student who has big ideas but often fails to follow through on those ideas. Mike borrowed $85,000 to pay for his tuition, books, and room and board. Mike is required to pay the money back to the bank, along with 6% interest, within 24 months of graduating. 2019 will be Mike’s 6^th year as a full-time student at TSU and the bank is concerned about Mike’s lack of motivation to graduate and find a job so he can repay the loan. The bank meets with Mike and agrees that if he graduates in 2019, the bank will forgive $30,000 of the debt. Mike is so grateful for the bank working with him on the loan and promptly completes his general studies degree by the end of 2019. Over the next 24 months, Mike works hard and pays the bank $55,000. At that time, the bank confirms in writing that the $30,000 of debt is forgiven.   At the time of the forgiveness, Mike had $20,000 of assets and no debts other than the $30,000 from the bank loan.

How much income (if any) must Mike report as a result of this transaction? Be sure to explain your answer and provide citations where relevant.

Answer 1

Mike must report $30,000 of the debt forgiven by the Bank. Some loan forgiveness programs are taxable and some are not. Under current law, the amount forgiven generally represents taxable income for the income tax purposes in the year it is written off. Generally, the student loan forgiveness is excluded from the income if the forgiveness is contingent upon the student working for a specific number of years in certain professions. In this case, Mike has paid $55,000 in 24 months and $30,000 should be reported as income in the current financial year.