The usual way is:

Special Receipts for the income (not taxable). Special Expenditures for the loan repayment (breaking things into two pieces if necessary, one taxable principal repayment, one for deductible interest). So you have it right that far.

I suppose depending on the amount, I would perhaps ignore the consequence of the lower balance and address that this time next year with a balance adjustment. We all pretty much adjusted up our balances this year anyway, so one year may not have that big of an impact. But if it's multiple years I suppose you could also just reduce the balance now. And then readjust it back up in a few years when the loan is repaid.

Dan