<p>My son's FA pkg includes the max $5500 in federal direct loans (Are these the ones they call Stafford?). I have a few questions...</p>
<p>Does the max amt one can borrow each year under this program rise as the student advances through college?</p>
<p>I understand the borrowing cost to be something like: Paying off $22000 in loans requires about $31000 over 10 years. But what if when he graduates we give him the money to pay off the $22000 or so in one fell swoop? Would he still owe the interest amount?</p>
<p>Your son’s Stafford loans will be $5500 freshman year, $6500 soph year, and $7500 each for junior/senior years.</p>
<p>There is a limit on the amount that is subsidized, and I don’t know that number…I believe it’s $3500 for freshman year.</p>
<p>Here is what I would suggest…pay the interest (if the loans are not subsidized) as you go…each year. It won’t be a lot. Then, yes…at the end, you can pay off the balance in one swell swoop.</p>
<p>The unsub portion is $2,000 each year. The subsidized portion increase, $2,500 to $3,500, to $4,500.</p>
<p>I have a question related to the OP’s query: I know that you can pay college expenses for your kid at the time they are due without it being considered a gift for federal tax purposes. But what if you do as the OP is considering (as are we) of accumulating enough money while the kid is in school to pay it off in a lump sum on graduation? Does anyone know the tax implications of that?</p>
For freshman year, up to $3,500 of the $5500 may be subsidized, if there is financial need. It can all be unsubsidized if there is no financial need. For sophomore up to $4,500 my be subsidized, and for years 3 & 4 up to $5,500.</p>
Yes, direct and stafford loans are basically the same thing. Direct loans are organized directly through the school - i.e. you do not have to borrow them through a bank. Up to a couple of years ago, some schools did not participate in the direct loan program, so students had to borrow the approved amounts from banks that offered Stafford loans. A couple of years ago all schools were required to participate in the direct loan program and the loans are no longer available through banks. They were Stafford loans for so long that I think everyone just keeps calling them that. But the conditions are identical.</p>
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Interest on unsubsidized loans starts to accumulate the day the loan is disbursed. He will still owe the accumulated interest up to the date the loan is paid off. If any part of the loans is subsidized, then no interest will accumulate on it until he graduates or drops below half time. (there used to be a 6 month grace period for the interest on the sub direct loans, but that is gone for new loans).</p>
<p>The limit on tax-free gift money is $13K per year (please verify the amount as it keeps rising over the years). Each year you can gift up to $13K to a gift recipient. If you are married, you and your wife can jointly give away up to $26K per gift recipient.</p>
<p>There is an exclusion in the gift tax law for education expenses you pay for someone else. You can go to IRS.gov and type “gift tax exclusions” into the search box. You’ll be able to get to FAQ where you’ll see that “tuition or medical expenses you pay for someone” are not gifts.
Hope this helps!</p>
<p>Yes, I know that. The question is, if the tuition is long since paid, by a student loan, and money has been set aside (by the parent) to pay that loan, if the money is then used to pay off the loan, then is it considered a gift?</p>
<p>But since, according to lerkin, DW and I could jointly give her $26K, and her loans should not be more than $23K, I suppose it really doesn’t matter.</p>
<p>Not really. Not to mention the fact that the way that gift tax is figured is this…
You can give up to 13k to any one individual per year. Again, tuition doesn’t count. If you give more than that, you can choose whether to pay tax immediately on the excess gift or to reduce the amount that can pass tax free at your death. The current amount that passes tax free to someone other than your spouse (no limit) or to a charity (no limit) is $5 million. </p>
<p>I think for most folks this is a non issue.</p>