The Newark Star-Ledger’s Bamboozled column has yet another sad story of parents burdened with their son’s student loans after he died too young. It’s definitely an article worth reading, especially for a section at the end that talks about mistakes being made by lenders after a loan is forgiven.
What happens is that lenders report canceled debts in excess of $600 to the IRS with a 1099-C form. The canceled debt is generally considered to be income for the borrower, so the borrower should be including the info from the 1099-C on his tax return. Depending on the amount of the loan, this can have a noticeable impact on how much the borrower owes or receives as a refund from the IRS.
Bamboozled reports that some lenders have been sending 1099-C forms to co-signers of forgiven loans, which means that the co-signers’ tax returns could now be negatively affected. However, it turns out that co-signors should not be receiving these forms in the first place.
“Solely for purposes of the reporting requirements of this section, a guarantor is not a debtor,” a certified public accountant tells Bamboozled, citing Treasury Regulation Sec. 1.6050P-1(7). “(It states) that co-signers are not considered debtors for reporting purposes and that reporting is not appropriate with respect to a guarantor, whether or not there has been a default and demand for payment made upon the guarantor.”
He says that co-signers who receive a 1099-C in error should contact the lender and ask it to issue a correct form.
In a recent Q&A series, the Consumer Financial Protection Bureau’s Student Loan Ombudsman told Consumerist that some student loans have conditions that allow co-signers to be released from any debt obligation, usually after the borrower makes a certain number of on-time payments. If you are a co-signer on a loan, you should ask the borrower to talk to their lender to see if such a release is possible.