student loans gift tax parents

Student Loan Help From Family Could Mean Extra Taxes

Michael Lux Repayment, Student Loan Blog 6 Comments

The week we received an email from Steve with an interesting tax question. Steve is about to be the lucky recipient of a bunch of money from his family. He intends to use this money to pay down his student loans. Unfortunately, this can potentially trigger a gift tax bill from the IRS. The good news is that there are ways of avoiding this taxation.

Steve writes:

I have $30,000 left on school loans I’ve been paying on for years (no late payments). My family wants to pay them off for me so its done with. What is the best way to do this? Do I have them gift me the money, then me pay it off? Or have them directly pay it off? What does each option have to do with taxes when the time comes?

Thank you for the help.


Student Loan Payments and the Gift Tax

Under federal tax law, large sums of money given to another individual are subject to a gift tax. In 2020 the gift tax has to be paid for gifts over $15,000. There are gift tax exceptions for gifts to a spouse, medical payments, and tuition payments. Unfortunately, student loan payments do not fall within a gift tax exception.

Like an inheritance, the person making the gift is usually the party responsible for paying the gift tax.

It is also worth pointing out that whether the money goes directly or indirectly to the beneficiary, the tax is still incurred. This means that whether Steve’s family gives him the money directly or just pays off his student loans, they still potentially have to pay the gift tax.

For more details on gift tax basis, be sure to check out the IRS Frequently Asked Questions on Gift Taxes. Borrowers can find detailed instructions on the gift tax in IRS Publication 559.

The good news is there are a few ways in which Steve and his family can potentially avoid having to pay any gift tax.

Avoiding Gift Taxes on Student Loan Payments

One of the most common ways to avoid gift taxes is to spread the money out over several years. Steve’s family could give him $15,000 in 2020 and then another $15,000 in 2020 without triggering any gift tax.

The gift tax also treats spouses as individuals. That means Steve’s mom and dad could both contribute $15,000 in 2020 without having to pay any taxes. If Steve received $15,000 from his mom, dad, grandpa, and grandma, he would get a total of $60,000 without any family member having to pay a gift tax.

Student Loan Exception to the Gift Tax

There is one scenario in which a student loan payment from the family may not be subject to the gift tax.

According to the Wall Street Journal payments made by a co-signer towards a student loan are not subject to the gift tax. For example, if Steve’s mom co-signed his student loans, she is legally responsible for the debt just like Steve. As such, if she paid off a student loan that she was the cosigner on, she wouldn’t have to pay a gift tax on the payment, even if it is above $14,000.

Paying More than $15,000 on Student Loans

Suppose the full $30,000 from Steve’s email comes from a wealthy uncle, and none of the previous strategies we outlined will work. Even in this circumstance, the gift tax is avoidable.

The $15,000 limit is the yearly limit on gifts. However, there is also a lifetime limit, commonly referred to as the unified credit. As of 2020, the unified credit is over 11 million dollars. That means Steve’s uncle can give him the full $15,000, and then subtract the remaining $15,000 from his unified credit. However, this does require filing a special return. More on the unified credit can be found on TurboTax and the IRS page on the Estate Tax.

In other words, student loans can be paid off by family members (or non-relatives) without paying any gift tax… as long as you file the proper paperwork.

Bottom Line

Large contributions towards student loan debt are subject to the federal gift tax.

However, there are a number of ways in which borrowers and their families can avoid this tax.  Whether you give the money or receive it, make sure to get familiar with these concepts. Once you have your mind wrapped around the basics, be sure to discuss your different options with an accountant to ensure you don’t violate any IRS rules.

Finally, keep in mind that this article just focused on federal tax issues. Your state may have additional taxes that could be triggered by a student loan gift. As with any technical tax question, it is always best to discuss your options with a local tax expert.

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Michelle Fink
Michelle Fink

If a parent pays off a student loan as co-signer, do they then have an action against their child for repayment?

The Student Loan Sherpa
Reply to  Michelle Fink

Possibly. I think it would depend upon the loan agreement that you both signed, any discussions the parent had with their child regarding repayment, and the laws of your state. I’d suggest talking with a local attorney. This is really more of a contract question than a student loan question.

The Student Loan Sherpa

It is possible. I’d suggest your dad bring this up with whomever prepares his taxes. There are ways around it as described in this article, but it has to be done right.

Ted Gorter
Ted Gorter

I have a situation where my family wants to contribute about $5k toward my $30k+ balance. I’m currently doing income driven payments. Would the $5k payment affect my income driven payments?

The Student Loan Sherpa
Reply to  Ted Gorter

It would not. As long as the $5k is not taxable income for you, it won’t affect your IDR payments.


Thank you!