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<p>There is a tax implication for that. IRS will expect either tax on the interest that should have been paid, or if the interest and principal is forgiven, the forgiven amount is considered as income to the student. Again, I am not an accountant, but there some rules that govern loans given to relatives. IRS will consider this as tax evasion strategy unless it is done right. Some accountants may want to weigh in on this topic.</p>
<p>Here is something that I found on the web</p>
<p>[Loans</a> Among Family Members - Personal Finance - Debt - SmartMoney.com](<a href=“Personal Finance Advice - Personal Financial Management - MarketWatch”>Personal Finance Advice - Personal Financial Management - MarketWatch)</p>
<p>Of significance</p>
<p>*
Set an Interest Rate
Interest-Free doesn’t mean hassle-free. Many loans among family members are interest-free. But be careful. If you don’t set an interest rate, the IRS, in its family-friendly way, will do it for you. And since that interest would be considered income for the lender, the IRS will happily tax the interest payments that were never paid. You have now entered the hideously complex world of “imputed interest.” Essentially, the IRS, eager to raise revenue, has decided that for a loan to be a loan, interest must be paid, and if interest is being paid, someone is making taxable income.</p>
<p>The IRS’s enthusiasm does not stop there. Not only does the agency place a tax on imaginary income, but it assumes that the borrower could not afford to make the interest payments (he had to borrow money, didn’t he?) and then acts as though the lender gave him the money to pay the interest. Enter the gift tax. So the money the lender never received but pays taxes on anyway could also count against the $11,000 annual tax-free gift limit, and if it exceeds that, then the gift and estate tax exemptions. This is not all as bad as it sounds, and in most cases these penalties can be avoided with good planning.*</p>