Parent Pay Off of Child's Student Loans - How To?

[billsfan1_2000]

Hello community....

I am looking for definitive guidance (step by step how-to type info) on how best to address a parent pay-off of child's student loans.  Fact outline as follows (US based):

- Child graduated from law school May 2024, begins paid position (starting comp $100k) in August 2024
- Law School student debt ~$200k
- Payments commence in December at ~8%

We are NOT paying 8% interest to anyone, hence trying to engineer the following:

- I pay off student loan in one lump sum.  Liquidity to do so is not a problem, funds are right at hand
- Child pays parent, either interest only or P&I on some schedule, say 10 years?
- We charge a nominal rate of interest at least equivalent to the prevailing AFR
- If we go the interest only route I'd want to forgive the principal because, after all is said and done this is his inheritance anyway so he's going to get the money one way or another
- I know there are potentially gift tax implications, however, no tax will ever be owed as this "gift" is wayyyyyyy below the lifetime limit

Anyone knows of a how to guide / primer especially regarding potential IRS entanglements?

Thanks for any insight!

[therethere]

If you have the money, and you acknowledge it is essentially their inheritance. Why are you making it so complicated? Just pay off the loan and let your kid know that their portion of the inheritance is reduced by that amount.

It seems like you don't care about what actual amount they end up paying back. So it seems a little crazy to do all this mental gymnastics just to charge your kid a lower interest rate to yourself and then forgive a portion later.

[former player]

Congratulations to your child, and to you on your successful child rearing.

What are you trying to achieve here, other than not having 8% interest go out of the family?  If all you are trying to achieve is not having 8% interest go out of the family then you pay off the loan and enter into a contract with your child that will mean that they pay the same amount to you as to the student loan company, on the same terms.

But your other questions are about other things: whether you make a gift to your child and if so how much and on what terms and conditions.  And that raises all sorts of questions that we have no idea how to answer, as they depend on individual personalities and behaviours, on family dynamics, and on a full appraisal of the financial situations of everyone concerned, including any other members of the family with a potential interest, such as any siblings to your lawyer child.

I'd be tempted to say: if you have an educated, responsible child and money to spare why wouldn't you make a gift of the repayment? 

Other mustachians will be of the bootstraps/pull yourself up persuasion.

[Catbert]

The annual gift tax exclusion is 18K this year.  If it otherwise works I'd suggest forgiving the loan at this rate which adjusts yearly.  Why?  If you go over the exclusion amount, filing the gift tax form and tracking for the rest of your life is a minor inconvenience.  However, the lifetime gift/inheritance limit is subject to change at any time.  It's 13 million or so now, but is scheduled to drop in 2026 to around 6 million.  Who knows what Congress will do.  If you have 200K easily available in cash you likely have a substantial estate and might bang up against the lifetime limit.     

If you gifted your child 18K a year (by forgiving part of the loan) for 10 years that would work mathematically.

[Villanelle]

It's unclear to me what you are trying to accomplish, so offering meaningful advice is tough.  That said, I'd likely pay it off and set up a loan with the kid at a moderate interest rate.  If your motivation is keeping their costs super low, just do IO if you prefer.  (Keep in mind that you will potentially need to report the interest paid to you as annual income.)  Each year, forgive an additional $Xk- whatever the gift tax exclusion is at the time--until the loan is gone.  Sure, you can gift more than that, and it's manageable, but could cause some headaches. 

[Sibley]

Y'all do not understand the gift tax rules. Stop giving bad advice please.

The gift tax exclusion (18k) is the amount to stay under if you don't want to have to fill out any paperwork for the IRS. You can still gift more, you just have to do some paperwork. There's a lifetime gift amount that you have to stay under to not pay taxes. That amount is over $10million.

https://smartasset.com/estate-planning/gift-tax-explained-2021-exemption-and-rates

[Villanelle]

Y'all do not understand the gift tax rules. Stop giving bad advice please.

The gift tax exclusion (18k) is the amount to stay under if you don't want to have to fill out any paperwork for the IRS. You can still gift more, you just have to do some paperwork. There's a lifetime gift amount that you have to stay under to not pay taxes. That amount is over $10million.

https://smartasset.com/estate-planning/gift-tax-explained-2021-exemption-and-rates

That's why I said it's "manageable but could cause some headaches".  That paperwork is the "headaches".  And it looks like Catbert mentioned a gift tax form and a $13m current cap.  So what is this "bad advice" you mention?

[ixtap]

Y'all do not understand the gift tax rules. Stop giving bad advice please.

The gift tax exclusion (18k) is the amount to stay under if you don't want to have to fill out any paperwork for the IRS. You can still gift more, you just have to do some paperwork. There's a lifetime gift amount that you have to stay under to not pay taxes. That amount is over $10million.

https://smartasset.com/estate-planning/gift-tax-explained-2021-exemption-and-rates

Given that this is the same.advice given above, not sure the anger issues have anything to do with what you have read here.

[Sibley]

You are correct, I misread. And probably shouldn't have been on the internet anyway.