Can you pay off someone else’s loan? As a general rule, yes — so if you’re a student loan borrower and someone offers you assistance in paying off your loans, you may want to take them up on it. But it’s important to understand the implications. While a parent, grandparent, or even a mysterious benefactor could pay off your student loans, they may be responsible for a gift tax if they contribute more than the annual limit. The gift could also come with emotional strings attached.
Read on to learn about the tax implications of paying off someone else’s student loans — and how to repay your loans if the responsibility is all yours.
Table of Contents
Key Points
• If someone pays off your student loans, they may face a gift tax if the amount exceeds the annual IRS exclusion limit.
• Employers can contribute to your student loans without it counting as taxable income, up to a certain amount per year.
• Payments made by parents or others directly to the loan servicer do not count as taxable income for the recipient.
• Gift tax implications apply if a single individual gifts more than $17,000 in one year, but actual tax liability may depend on lifetime gift amounts.
• Financial planning is recommended for parents considering paying off a child’s student loans to ensure it doesn’t impact their retirement
Student Loan Repayment
For federal student loan borrowers, the end of the three-year pause on federal student loan payments has made repayment top of mind again. The resumption of federal student loan payments, which was part of the debt ceiling bill President Joe Biden signed into law in early June 2023, requires interest accrual to resume on September 1, 2023, and payments to resume on October 1, 2023. (Borrowers who held private loans did not have any uniform break in payments.)
Additionally, the President’s plan to forgive up to $20,000 in federal student loan debt was struck down by the Supreme Court in late June 2023. That means federal student loan borrowers no longer have that course of action.
The bottom line: If you have a student loan balance, it needs to be paid. If you have a cosigner — which may be the case if you have private student loans or federal PLUS Loans — then that person is legally responsible for repaying the loans if you are unable to do so. But if your student loans are solely in your name, you are responsible for repayment according to the outlined terms.
Getting Help From Your Employer
More employers are offering student loan repayment as a perk. Through CARES Act legislation, employers can contribute up to $5,250 per employee per year toward student loans without the payment counting toward the employee’s taxable income, through 2025.
💡 Quick Tip: Often, the main goal of refinancing is to lower the interest rate on your student loans — federal and/or private — by taking out one loan with a new rate to replace your existing loans. Refinancing makes sense if you qualify for a lower rate and you don’t plan to use federal repayment programs or protections.
Can Parents Pay Off Their Child’s Student Loans?
Yes they can. But can parents pay off student loans without a gift tax? It depends. If a parent is a cosigner, paying the student loans in full will not trigger a gift tax. In the mind of the IRS, the parent is not providing a gift but is paying off a debt.
However, if a parent is not a cosigner, a gift tax could be triggered, depending on how much they pay.
How the Gift Tax Works
The gift tax applies to the transfer of any type of property (including money), or the use of income from property, without expecting to receive something of at least equal value in return, the IRS says — adding that if you make an interest-free or reduced-interest loan, you may be making a gift.
There are some exceptions. Gifts between spouses aren’t included in the gift tax. That means if you are married and your spouse pays off your loans, that would not trigger a gift tax event. (The IRS includes lawfully married same-sex couples.)
Tuition paid directly to qualifying educational institutions in the United States or overseas is also not subject to gift tax. But student loans are different.
The annual exclusion for gifts is $17,000 in 2023. That means an individual can give you up to $17,000 without triggering the gift tax, which the givers, not receivers, generally pay. If your parents file taxes jointly, they would be able to give a combined $34,000 a year, which could include paying down loans. Borrowers who have the good fortune to snag $17,000 from Mom, Dad, Granddad, and Grandma could get a total of $68,000 without any family member having to file a gift tax return.
Note, though, that even a gift of more than $17,000 towards your student loans doesn’t mean that your generous benefactor is on the hook for paying a tax on their gift. The excess amount just gets added to the lifetime exclusion — currently set at $12.92 million. As long as the benefactor’s total lifetime gifts are below that amount, they don’t have to worry about paying a gift tax. Still, if bumping against that lifetime exclusion is a concern, they can spread out their support over the years to avoid gifting you more than $17,000 in a calendar year.
The upshot is that the main concern when it comes to helping children out with their student loans is probably not the gift tax, but whether the parent can afford it. It’s a good idea for parents to consider their retirement plans and test what-ifs before offering to pay their children’s student loans. Working with a financial planner may help parents find a path that works for them and their children.
It’s also not an all-or-nothing decision. Some parents choose to pay a portion of student loans or offer cash toward repayment in lieu of other gifts.
Recommended: Should Parents Cosign on Student Loans?
What Happens When Someone Pays Off Student Loans For You?
A person can pay off student loans for you in a couple of ways:
• Pay the lender directly
• Pay you, with the expectation you will pay the lender
But if someone pays off your debt, is that income? Once another person has paid off your student loans, it’s as if you had paid them off yourself. You would not have any tax liability.
Other Options to Pay Off Student Loans
Not everyone has a benefactor, of course. While someone taking your student loan balance down to zero can seem like a dream, there are realistic ways to ease the burden of student loans, no third party required.
These strategies include student loan consolidation, student loan refinancing, and in some cases, student loan forgiveness.
The one thing that won’t help: if you stop paying your student loans. Ignoring your student loan payments will result in an increased balance, additional fees, and a lower credit score.
If you hold federal student loans and stop paying them, part of your wages could be garnished, and your tax refund could be withheld. If you default on a private student loan, the lender might file a suit to collect from you.
In other words, coming up with a repayment plan is crucial.
💡 Quick Tip: When refinancing a student loan, you may shorten or extend the loan term. Shortening your loan term may result in higher monthly payments but significantly less total interest paid. A longer loan term typically results in lower monthly payments but more total interest paid.
What Is Student Loan Consolidation?
If you have federal student loans, you may consider consolidation, or combining multiple loans into one federal loan. The interest rate is the weighted average of all the loans’ rates, rounded up to the nearest one-eighth of one percentage point.
Federal student loan consolidation via a Direct Consolidation Loan can lower your monthly payment by giving you up to 30 years to repay your loans. It can also streamline payment processing.
Consolidating federal loans other than Direct Loans may give borrowers access to programs they might not otherwise be eligible for, including additional income-driven repayment plan options and Public Service Loan Forgiveness.
What Is Student Loan Forgiveness?
Although President Biden’s federal forgiveness program was blocked by the Supreme Court, there are still several paths toward student loan forgiveness for federal student loan holders. They include:
• Income-based repayment. Federal income-driven repayment plans promise loan forgiveness after a certain amount of time, depending on the plan.
For instance, under President Biden’s new SAVE Plan, which is based on income and family size, qualifying federal student loan borrowers with undergraduate federal loans can get their monthly payments reduced by half — from 10% to 5% of their discretionary income. And after 10 to 20 years of making payments (the number of years depends on how big their original student loan balance was), the remainder of what they owe will be forgiven.
• Public Student Loan Forgiveness: This federal program was designed to help graduates working in public service have any remaining loan balance forgiven if they meet criteria that include working for a qualifying organization and making 10 years’ worth of payments.
• Disability discharge: Some people may have their loans forgiven because of total and permanent disability.
What about bankruptcy? It’s extremely difficult to have student loans discharged through bankruptcy.
What Is Student Loan Refinancing?
With student loan refinancing, a borrower takes on one new, private student loan to pay off previous federal and/or private student loans. Ideally, the goal is a lower interest rate. The repayment term might also change.
However, there is a very important caveat for those with federal student loans: Refinancing those federal loans means that borrowers will no longer be eligible for federal repayment plans, forgiveness programs, and other benefits. If a borrower needs access to those programs, student loan refinancing won’t make sense.
But for borrowers who have no plans to use the federal programs, a lower rate could make refinancing worthwhile. Using a student loan refinancing calculator can help a borrower see how much money they might save by refinancing one or all of their loans.
Refinancing Student Loans With SoFi
Even if your parents, grandparents, or others in your life are not in a position to pay off your student loans for you, understanding your options for potentially lowering your monthly payments or saving money over the life of a loan can give you multiple avenues to explore as you work toward taking control of your finances.
Looking to lower your monthly student loan payment? Refinancing may be one way to do it — by extending your loan term, getting a lower interest rate than what you currently have, or both. (Please note that refinancing federal loans makes them ineligible for federal forgiveness and protections. Also, lengthening your loan term may mean paying more in interest over the life of the loan.) SoFi student loan refinancing offers flexible terms that fit your budget.
FAQ
Can I pay off my child’s student loans?
Yes, you can pay off your child’s student loans. But, depending on the amount, there may be tax implications.
Is paying off a child’s student loans considered a gift?
Yes. Paying student loans for someone else is considered a gift and would incur a gift tax for any gift above $17,000, which is the gift exclusion cutoff for 2023.
That means both parents can contribute $34,000 per calendar year toward their child’s student loans without owing gift tax.
Can I pay off my sibling’s student loans?
Yes. You can absolutely win sibling of the year and pay off your sibling’s student loans. Just know that any gift above $17,000 in 2023 will trigger a gift tax that you will be responsible for paying.
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