The year a written-off loan became a tax question again

It is the cancellation of a debt you had a legal duty to repay. Tax law generally treats a cancelled debt as income, on the basis that you kept money you would otherwise have paid out. Education loans are not automatically outside that rule.

Because a temporary provision expired. The IRS lists the exclusions from cancellation of debt income, and among them sits a specific entry for certain student loan discharges after 31 December 2020 and before 1 January 2026. That window has now closed.

So a discharge happening today does not get the benefit of that broad exclusion. It has to find its own way out of income, or it stays in.

This is the kind of change that quietly rewrites advice written two years ago. Anything you read from that period assumed a window that has since closed.

Several, and they matter more now than they did. The same IRS list keeps a discharge outside income where it follows the death or total and permanent disability of the student. Those two sit in the law permanently rather than under a sunset date, so they survive the end of the temporary window.

It also keeps out loans containing cancellation provisions based on length of employment in certain professions for a broad class of employers, along with amounts received or forgiven under certain student loan repayment assistance programmes.

Two general exclusions run alongside those. Bankruptcy keeps cancelled debt out of income, and so does insolvency, to the extent your debts exceeded your assets. Publication 4681 explains that calculation with worksheets.

Insolvency is the one people overlook. It compares total liabilities with the fair market value of total assets immediately before the discharge.

Most people never clear the balance. Instead the Student Loans Company writes it off after a period that depends on your repayment plan. GOV.UK sets out the timing, and when a loan gets written off depends on the plan.

A Plan 2 loan ends 30 years after the April you first became due to repay. A Plan 1 loan taken out on or after 1 September 2006 ends after 25 years.

Repayment until then runs through payroll or through Self Assessment, at a percentage of income above a threshold. The repayment guidance sets out the plans and how each one works.

Grants and bursaries sit outside all of this, because they are not repayable in the first place.

Honestly, nobody can point to a published answer. The IRS has issued no guidance naming Plan 1, Plan 2 or postgraduate loans from the Student Loans Company, so there is no authority that settles the question either way.

What exists is the general framework. Cancelled debt is income unless an exclusion applies, and the exclusions listed above are the ones available.

Insolvency often becomes the realistic route. Someone reaching the end of a thirty-year plan may or may not qualify at that moment. It depends entirely on their balance sheet on the day.

We document the position rather than assert a rule. Writing down the reasoning at the time is worth far more than a confident sentence from a forum.

Yes. Moving overseas does not end the obligation, and the Student Loans Company sets repayment based on income in the country you live in. The guidance for moving abroad explains the process and the forms.

Payroll deduction stops when UK employment stops, so repayments move onto a direct arrangement instead.

People who ignore this often find interest and arrears waiting when they return. It is administratively dull and financially expensive to get wrong.

Tell the Student Loans Company before you go, not afterwards. A short form at the start replaces a long correspondence later, and it keeps the account on the correct repayment basis for the country you actually live in.

Sometimes. US rules allow a deduction of up to $2,500 a year for interest on a qualified student loan, subject to income limits. The IRS also states that you cannot claim it if your filing status is married filing separately.

That last condition removes the deduction for many Americans in Britain, because separate filing is the usual status alongside a non-US spouse.

Whether a UK loan counts as a qualified student loan is a separate question, and it turns on the loan's terms rather than on where the university sits.

Our note on married filing separately with a UK spouse sets out what else that status costs.

Two reliefs usually protect Americans abroad, and neither one reaches this. The foreign earned income exclusion applies to pay for personal services performed abroad, and cancelled debt is not pay for anything.

The foreign tax credit relieves foreign tax you actually paid. Britain does not tax a student loan write-off, so there is no UK tax to credit.

That combination is the uncomfortable part. A write-off can produce US income with neither of the usual shields available.

Our comparison of the exclusion and the credit explains where each one does and does not reach.

A discharge lands in one tax year, and the rules of that year decide the outcome. That was the whole point of the five-year window.

If you have any control over when a discharge happens, it is worth knowing what the rules look like in each candidate year.

Most people have no such control. Even then, knowing the year in advance lets you plan for the liability rather than meet it by surprise.

Borrowers on income-driven plans reach the question soonest, because their balances often outlive their repayments. Public service borrowers reach it too, though their loans usually carry a profession-based cancellation provision that keeps the discharge outside income. Everyone else meets it only if something goes wrong, such as a disability discharge.

Americans in Britain sit across both systems at once. They repay a UK loan through payroll and a US loan by direct debit from a dollar account.

So student loan forgiveness for them is really two questions with two answers. We treat them separately and then look at the year as a whole.

Keep the original loan agreement, because its terms decide whether a profession-based cancellation provision exists. Keep the annual statements, which show the balance and the interest you paid. Keep anything the lender sends about a discharge, particularly the date it took effect.

For a UK loan, note the April you first became due to repay. That single date sets the write-off year.

We ask clients to scan these once and forget them. The question can arrive two decades after the paperwork does.

Knowing the year turns a shock into a plan. You can look at what your income will probably be, whether an exclusion is likely to apply, and what the liability might look like if none does.

Three levers exist in practice. The timing of other income, the insolvency position on the day, and whether you hold assets you could sell before or after.

None of that is exotic planning. It is simply looking at a known date and preparing for it rather than discovering it in a statement.

Our clients who do this arrive at the year with a number in mind. The rest arrive with a letter and a fortnight to react.

Take this in order, because each answer narrows the next question.

Consider an illustrative case. An American who studied in England has a Plan 2 loan with a balance of £38,000, and the write-off falls due in nine years.

Britain will not tax the write-off. The US treatment depends on the position then, and on whether an exclusion such as insolvency applies at that moment.

The figures are illustrative, though the planning point is concrete. Knowing the date nine years ahead is what makes the question manageable at all.

First, relying on advice written while the temporary exclusion was still running. Second, assuming a British write-off is invisible because HMRC does not tax it.

Third, claiming the interest deduction while filing separately. Fourth, treating insolvency as a feeling rather than a calculation with a worksheet.

Fifth, discarding the loan paperwork after the final repayment. Our clients who kept the original terms have a much easier conversation when the question finally arrives.

Sixth, assuming the lender will explain the tax position. Lenders report what they cancelled; they do not decide whether an exclusion covers it, and they have no view on which country taxes the result.

We start with the documents: the loan terms, the plan type and the dates. Those decide which exclusions you can even reach, and they take an hour to assemble rather than a week.

From there we prepare the US federal return with the position stated and supported, including an insolvency calculation where one applies. Where the law genuinely does not answer the question, we say that in writing rather than dressing a guess as a rule.

If a discharge is coming, talk to us before it lands. Afterwards the options narrow and the arithmetic stops moving.