Student loan debt is growing substantially with each passing year. In fact, the average student loan debt is almost $39,000, and the average monthly student loan payment amount is $460. Unfortunately, that number is unlikely to go down with the rising cost of college tuition. For those who have loved ones with student loan debt, one of the best gifts could be helping them pay off student loans faster. You can do this by making a payment toward someone else’s student loans. However, it’s important to understand the tax implications before you move forward, including the gift tax and student loans.
What Are Gift Taxes?
Most people never have to worry about gift taxes. The exceptions are typically high net worth individuals who give away significant money or property. Gift taxes are a federal tax that applies to money or property you give to someone else as a gift rather than payment for a service or product. The donor is typically responsible for paying the gift tax, not the recipient of the gift.
Can Someone Else Pay Off My Student Loans?
If you’re wondering: can someone pay my student loans, the short answer is yes. There are different ways that someone can pay your student loans and help you move forward with your finances — and your life. When working with someone else to pay down student loans, it’s important to consider the easiest way to make payments. When making just one payment on behalf of someone else or making a large payment, it might be easier to just provide the cash and then watch the recipient use the money to reduce student loan debt. On the other hand, if you plan to make ongoing payments or want to pay a few times a year, getting set up as an authorized payer or using a third-party website can make sense.
The Gift Tax and Student Loans
When it comes to answering the question, can someone else pay off my student loans? It’s important to note that providing this money to someone, whether you give cash or make payments on their behalf, is considered a gift. Under U.S. tax regulations, taxes on a gift are paid by the giver, not the recipient. So, if someone else pays your student loans, they would be responsible for the taxes, not you. You can receive a gift of money without paying taxes on it. For those who want to pay off someone else’s student loans, it’s important to note how the gift tax works:
- For 2022, the gift tax exclusion is $16,000. So, it’s possible for someone to give up to $16,000 to someone else without paying taxes on that amount.
- The exclusion applies to individuals, so if you’re married, you could potentially give up to $32,000 as a married couple to one person to help them pay down student loan debt without paying taxes.
- You need to file a Form 709 with the IRS when you take care of your taxes. However, as long as the amount paid is within the exclusion amount, you probably won’t owe taxes on the gift.
- There’s a lifetime limit to the gift tax exclusion, currently $12.06 million for 2022.
- If you cosign on a student loan and make the payments, it won’t count as a gift, and it won’t need to be reported as such.
Tax Considerations If Your Employer Pays Off Your Student Loans
Some employers offer benefits that include making matching student loan payments or even just paying off some portion of your student loans. In general, an employer making student loan payments on your behalf is considered compensation, so you might have to pay taxes on the amount. Before you decide that the answer to can someone else pay off my student loans, consider recent legislation. A provision in the CARES Act offers a tax benefit for an employer-assisted student loan repayment program, providing a pre-tax benefit similar to the treatment of 401(k) contributions. Additionally, a provision in the CARES Act allows employers to contribute up to $5,520 annually toward paying off an employee’s student loan without taxes. So, now is a good time to take advantage of this provision, which is in place until December 31, 2025.
Using the Unified Credit to Avoid the Gift Tax for Gifts Over $16,000
If someone wants to pay your student loans beyond the $16,000 allowed, it’s possible to use a process known as unified credit. Basically, it’s possible to make larger gifts now by reducing the credit later upon death. This can work as a way to avoid gift tax student loans. Let’s say that you have $26,000 left on your student loans, and a relative decides to pay that off for you. For 2022, $16,000 of it won’t be taxed. However, your relative will owe money on the remaining $10,000 of the amount they gifted you to pay off student loans. Let’s say they own about $400 in taxes as a result of the gift. Rather than paying that amount now, they can file to use the unified tax credit now and avoid that tax bill. Later, when the relative dies, the credit will be reduced, and any tax owed will be paid by the estate.
Options to Gift Student Loan Payments
Give Them Cash or Write a Check
It’s possible to just give someone money that they can then apply to their own student loans. This is the easiest way to pass on the money, although there might not be a guarantee that the recipient will use it for their student loans.
Become an Authorized payer
When having someone else pay off your student loans, it’s possible to add them to the account as an authorized payer. In that case, they can make direct payments on the student loan debt, reducing the principal and helping you save money over time. Find out from the loan servicer how this process works.
Third-party Student Loan Payment Services
There are also third-party services that allow you to connect and make payments toward another person’s student loans. So, this is a good way to answer the question, can someone pay my student loans? Because it allows another person to help you out.
Match Their Payments
“Can someone else pay off my student loans?” If your child has asked this question, you may be worried about making things too easy for them. Having them repay their loans — and all the budgeting, planning, and discipline that entails — has its positives. However, you can make it easier for them while still requiring them to manage their own loans by matching their payments. You can decide to match a percentage of their payments up to a certain maximum. For example, you could say you would match up to 50% of their payment amounts. If they pay $3,000 toward their student loans this year, that means you’d pay an additional $1,500. This approach could motivate them to be frugal and make extra payments toward their debt, and your contributions would help them save hundreds or thousands of dollars.
Consult with A Tax Professional If You Need Help
If you need help with gift taxes — or tax planning in general — it’s a good idea to consult with a certified public accountant (CPA) or other tax professional. They can provide personalized advice and guidance on how to handle your taxes.
Maximize the Impact of Gifted Student Loan Payments
If you decide to help a loved one pay off their student loans, carefully consider how the approach can be maximized. One of the best ways to maximize the impact of gifted student loan payments is to refinance your student loans. This way, you could potentially get a lower student loan interest rate, ensuring that more of your payment goes toward reducing the principal. With a lower rate and more going toward your principal, you can pay off your debts faster, with more gifted student loan payments working on your behalf. ELFI offers student loan refinancing with no origination fees or prepayment penalties.* You can prequalify today, checking to see what interest rate you might be eligible for, with no impact on your credit score.
