Interest on student loans - Tax ?ions

[Anonymous]

I recently paid off Private student loan that was in default. Original balance was $4,000 which ballooned to $10,500. The CA (Collection Agency) the loan was assigned to accepted a lump sum of $8000 to settle the debt. I was wondering if I am now entitled to take a tax credit for the interest and fees ($4,000) for my federal tax return. If so, how much can I claim per year (does it roll over) and are the tax documents automatically sent to me by the CA, or do I need to request from CA and/or the original lender? Thanks in advance!  

[cdtotten]

At the end of each year your student loan servicer will provide you with a 1098-E which will have the student loan interest you can claim on your taxes. This deduction is an itemized deduction and is not capped. You are not eligible to claim the penalties paid, as the IRS is not going to reward you for defaulting.

[hawkeye33]

However, I believe you will also receive another form from the lender due to the settlement ($8000 of the $10,500 owed). Basically, on your income tax return, that $2,500 difference will be counted as additional income in your adjusted gross income.

[cdtotten]

Correct. If the balance you settled for is less than the total amount owed, they can legally send you a 1099-C (Cancellation of Debt), that will need to be included as income on your tax return and is taxable at your normal rate.