n the year the $100,000 is canceled the entire amount is taxable income.
This instantly shoves you up in bracket and frequently will cause you to pay income tax on the forgiven debt at or near the highest marginal rate.
What’s worse is that it’s all due at once in the year your debt is written off!
Don’t have it? Oh, that’s ok — the IRS will be happy to assess both penalties and interest for underpayment. Suddenly a huge chunk — as much as half perhaps — of that written-off debt will be owed in taxes, once you include interest and penalties.
What’s worse is that when you default on a student loan there is a statutory penalty that gets applied when it is sold to collectors. That penalty and any accrued interest is just as valid a debt as was the original principal. If the debt is later written off the jacked-up amount is what gets written off and 1099’d to you, so it is entirely possible given that statutory penalty and interest on the defaulted debt, plus IRS penalties and interest, to wind up owing the entire original amount (before those jack-ups) in taxes when the write-off happens!