According to the Tax Court, a student loan settlement leads to taxable income. After his college graduation, a taxpayer fell behind on his student loan. After trying to collect, the lender let him pay off the debt at a $28,000 discount. This amount is discharge of indebtedness income because there was no dispute that he was liable for the full amount of the debt.
(Martin, TC Summ. Op. 2011-62).
Insolvent debtors aren’t taxed on waived debts, but this exception didn’t apply here.