New Jersey Woman's Student Loan Debt Creates Tax Nightmare - Yahoo! When Kim Thompson's $91,000 student loan balance was cancelled due to total disability, she thought she had put at least one of her problems behind her. Instead, she traded it for another: a massive debt to the IRS. Two years ago, Thompson, who lives in New Jersey, was diagnosed with a tumor that eventually led to the removal of most of her small intestine, a pulmonary embolism, and 12-hour-a-day IV feeding sessions. She retired from her job on a disability pension in July 2010, and was able to get her federal student loans cancelled. There was no mention, however, that the debt would be reported to the IRS as Cancellation of Debt Income (CODI). "They didn't tell me it was taxable income," she says. "I had no idea." The IRS considers most types of cancelled debt taxable income. Lenders must report cancelled debts of $600 or more to the IRS on a 1099-C form. The IRS estimates some 6.3 million 1099-C's for all types of debts, including student loans, credit cards, mortgages, etc. were filed this year reporting CODI for the 2011 tax year. she wouldn't now owe the IRS some $26,000. In addition, she owes $5,000 to the state of New Jersey for cancellation of debt income. You don't owe, so you owe.