03 Jun I co-signed a student loan that’s in collections. Should I pay it off?

Q. I’m a co-signor on a student loan that is now in collections. The debt collector made an offer of a payoff amount to satisfy the loan. Will there be an amount of debt forgiveness involved and what would it mean for my taxes?
— Unsure

A. It can get complicated, and you should ask the debt collector specifically how it would treat the loan write-off.

The Internal Revenue Service has rules related to the discharge of debt which are detailed in Treasury Regulation Section 1.6050P-1(d)(7).

“As guarantor, you are not the direct beneficiary of the student loans and therefore are not responsible for the tax obligation that will arise as a result of the payoff,” said Claudia Mott, a certified financial planner with Epona Financial Solutions in Basking Ridge. “The IRS will issue a 1099-C with the amount of the payoff that will need to be shown on the beneficiary’s tax return.”

Any amount of discharged debt over $600 must be reported, she said.

However, there is a chance that the lender may issue a 1099-C to you as well because you are listed on the loan, Mott said.

“In the event this occurs, you should contact the lender and try to get them to fix the mistake by filing a corrected 1099-C,” she said. “If you are unable to get a corrected 1099-C, you will need to have your tax professional help you decide the best course of action to take.”

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This story was originally published on June 3, 2020.

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