Student Loan Questions

Is your son your dependent?

If not, you don't qualify to claim the deduction. Payments you have made are considered gifts to him, with the payments credited to him. If he is your dependent, you are legally obligated to make the payments, and actually do make the payments then you can claim the deduction.

Although, this doesn't address the OP's original question, it does focus on the above response he received. It would seem to me that if: 1) you were a co-signer for the loan, and 2) the loan has reverted to you, and 3) you are making the payments on the loan then: 1) Your loan payments are being made to the lender in fulfillment of your obligation, and 2) Are not a gift to your son and therefore, to the extent that the loan qualifies for deduction, you may deduct it whether your son is your dependent or not.

However, if you want to let your son claim the deduction, then 1) The loan payments become a gift to your son, and 2) you probably need to get an answer to your original post,which I'll leave to the experts to do.

I might also suggest that if the value of the deduction is only "a little over a hundred dollars not matter which of you claims it", why don't you claim the deduction and then gift your son the amount you will save in taxes.

This was my *non*professional interpretation, based simply on the fact that Wells Fargo reported it to the IRS under my name and SSN. He is not my dependent now, and I honestly don't remember if he was when the loan was originally signed, but I don't think that matters a bit at this point in time.

You think like me. :-) That was exactly what I was thinking of doing.

Under the facts as described, the OP is legally liable to pay the loan since he was the co-signer, and, assuming that the loan was otherwise a "qualified education loan" the OP can claim a deduction for student loan interest paid. See Treas. Reg. 1.221-1(b)(1). Since the OP's son is no longer legally obligated to pay the loan (I assume that was the effect of his bankruptcy), he cannot claim the deduction because there must be a legal obligation to pay such interest. See Treas. Reg.

1.221-1(b)(1). It's not so much a matter of whether the OP "must" report the amount because it was reported in his name, but rather that the OP is the only person to whom such a deduction is allowed. If the OP's son claims the deduction, the deduction will be denied on the basis that Wells Fargo did not report him as the payor, and the son will then have to prove that (a) he was liable on the loan, and (b) the OP made the payment and received the Form as the son's nominee. Since the son is no longer liable on the loan, he won't succeed and the deduction will be denied. This is not a place where you want to play the audit lottery because it's a fairly automated process now to cross-check student loan interest deduction claims against reports from lenders. If the OP wants to give his son the benefit of the deduction, the OP should claim it and then give his son cash equal to the tax benefit of claiming the interest. If the OP is in the 20% bracket and the payment was $110, the OP would then give his son $22. That's clearly within the limits for excludable gifts.

A discharged debt can be reaffirmed under bankruptcy law, which revives the legal obligation to pay.

That would certainly be the easiest way, and probably the most cost effective as well, since the parent is probably in a higher tax bracket than the child, so the savings would be greater when the parent takes the deduction. Stu

True enough, but if the primary debtor had reaffirmed the debt, then (a) there is a distinct possibility that the co-signor would be off the hook because (i) he most likely did not reaffirm the debt (which is tantamount to making a new debt) and (ii) the reaffirmation could be treated as a modification of a debt that excuses performance by the guarantor (in this case, the co-signor is most likely to be treated as an accomodation party rather than a substantive debtor, and thus accorded the status of guarantor rather than primary obligor on the debt). As a result, the lender would be able to look to the original debtor to pay the debt, but would probably have lost their claim to require repayment by the co-signor/surety, in which case they would have sent the interest reporting form to the original debtor who had reaffirmed the debt instead of to the co-signor/surety. On that basis, it seems reasonable to assume, in the absence of further facts, that the OP's son did not reaffirm the PLATO debt after his discharge. As a result, only the OP would have a legal obligation to pay the interest.

Actually, his obligation on this loan was not discharged by his bankruptcy, and to my knowledge would not have been even if I had not co-signed it. The way I understand it, you can't d/c *any* student loan by bankruptcy action. Even though the instruction booklet is somewhat ambiguous as to whether or not I can take the deduction, TurboTax

*clearly* says "the loan must be (or have been) for your own education" (quoted as closely as I can from memory).

I am fully retired and live on my military retirement pay; he actually makes more than I do now. Again, thanks **very much** to all who took time out of their day to help. :-) Dennis

I haven't researched this recently, but my understanding is that it is difficult but not impossible to discharge some student loans.

That's true of deducting interest on student loans. But as for qualifying tuition and related expenses, the deduction can be made for the education of the taxpayer, spouse or a dependent. Stu

If that is what TurboTax says, then TurboTax is wrong. According to the statute, if you became legally responsible for payment on a student loan for your child where the loan itself and your obligation were incurred when your child was a "dependent" of yours, and you pay interest on that loan, then you can deduct that interest for the year in which paid (provided that the other requirements for deductibility are satisfied). As such, the statute clearly contemplates parents incurring student loan debts on behalf of their dependent children, and provides the parents a deduction for any interest they pay on those loans. Furthermore, the requirement that the child be your "dependent" only applies at the time that the debt is incurred by you - i.e., when you signed as cosigner when the loan was originally taken out. The fact that a child may no longer be a "dependent" at the time the parent makes an interest payment on the loan is irrelevant to whether that interest is deductible by the parent; all that matters is that the child have been a "dependent" when the loan (and the parent's legal obligation to pay) was incurred, and that the parent have a legal obligation to pay the interest.

I don't see why the creditor should lose the guarantee by the guarantor based on actions taken purely by the debtor.

That's always been his status.

Again, how can the guarantee just go away?

Seth

If there is a change in the underlying agreement that the guarantor did not agree to, he is not bound by the change. And he may be off the hook with respect to the original agreement because it has been terminated in favor of another one. Stu

The law of sureties and guarantors has long given particular protection to persons who guarantee the debts of another, particularly when the guarantor does so without adequate compensation for the risk taken (i.e., the guarantor is not acting as an insurer). The basic rule is that the guarantor is only on the hook for the debt that he agreed to, not for whatever subsequent debts the creditor and the primary debtor might cook up later on. In addition, the rules are designed to prevent the creditor and the primary debtor from colluding against the guarantor, e.g., by the creditor excusing repayment by the primary debtor and, effectively, turning the guarantor into the primary debtor and an unwilling donor who made a gift of the borrowed funds to the erswhile primary debtor. The specific details of the law will vary from state to state, but generally the courts have given great protection to guarantors and have viewed any significant modification of a debt as excusing the guarantor, regardless of whether the modification decreased or increased the risk of the guarantor. Without doing a 50-state survey, I would hazard a guess that at least a few courts have refused to excuse a guarantor where the modification benefitted rather than harmed the guarantor. Thus, any action on the part of the creditor or the debtor that is inconsistent with the terms of the deal that the guarantor initially agreed to will generally relieve the guarantor of his obligations unless the guarantor agrees to the change in terms.

Was it terminated or just modified? Re-affirming doesn't create a new debt, it underscores the validity of the existing one. Consider: A lends $5,000 to X, guaranteed by Y. X pays off $1,000 then stops, and later files bankruptcy. A raises the $4,000 remaining to $6,000 to cover fees, etc. as provided in the contract. Y should still be on the hook for $4,000 (his original $5,000 less the $1,000 paid by X). (I'm ignoring interest, all payments mentioned are principal.) It isn't fair to Y that A and X can increase his debt, nor is it fair to A that X and Y can decrease it (without both filing bankruptcy). Seth