If a lender allows a graduate to pay less than the full amount of a loan, that entire discount is considered taxable income by the IRS. Example: A lender agreed to reduce a student’s loan by $28,000 – so the IRS said that the student had $28,000 in taxable income. A court agreed with the IRS positions. What to do: Discuss any loan forgiveness or other changes in debt status with a knowledgeable financial advisor. Be aware the discount is not considered taxable income if the graduate works in certain professions for set periods in specified areas (such as a teacher in an inner city).