IRS Gifting Rules: Tuition vs. Student Loan Payments
Helping a family member pay for education? Make sure you're on the right side of the IRS.
Whether you're covering K–12 tuition, writing checks for college, or assisting with student loans after graduation, the tax treatment of those payments isn’t always intuitive. The IRS draws a clear line between direct tuition payments and student loan contributions—and crossing that line could mean triggering gift tax rules you didn’t anticipate.
As the cost of college and private school continues to rise, it's increasingly common for extended family members—not just parents—to want to assist with the cost of tuition or student loan payments after graduation. However, many of those family members are surprised to learn that there are different gift tax and tax reporting rules that are dependent upon whether a direct tuition payment is made versus just helping with student loan payments post-graduation.
Tuition Payment Gift Exclusion
Because there are different gift tax rules that apply when making a tuition payment on behalf of someone else versus making a student loan payment for someone else, we will start with the tuition payment scenario first. Oddly enough in the eyes of the IRS, when someone makes a tuition payment for another person, the IRS does not view it as a “gift”. However, if that same person instead decides to help a family member pay off their student loans, the IRS views that action as a “gift”. So, when we have grandparents who want to help their grandchildren pay for college, we often advise them to provide their support as tuition payments directly to the college as opposed to allowing their grandchild to take the student loans and then assisting them in repaying the student loans after they have graduated.
As long as the tuition payment is made directly to the college from the family member, it does not constitute a gift, and gifting limits do not apply. However, if the money is not remitted directly to the college, then the gifting rules do apply. Sometimes, family members make the mistake of giving money directly to the student or the parents of the student to make the tuition payments; if that happens, they have now made a gift and must follow the gift tax and reporting rules.
What about tuition for a K-12 private school? The tuition gift exclusion also applies to tuition payments for preschool and K-12 private schools.
Another important note, the gift exception only applies to tuition. It is not extended to room and board. If a non-parent pays for the room and board on behalf of a student, it is considered a gift.
Student Loan Payment Gift Tax Rules
When someone makes a loan payment on behalf of someone else, the IRS considers that a gift. This is true whether the money is given to the individual and then they make the loan payment, or if payments are made directly to the loan servicer on behalf of the college student / graduate. As mentioned earlier, there are gift reporting rules and potential gift tax implications that the individual making the gift or loan payment needs to be aware of.
Annual Gift Exclusion
For 2025, the annual gift exclusion amount is $19,000, which, for purposes of this article, means any one person can make a student loan payment for someone else up to $19,000 per year without having to worry about filing a gift tax return or paying gift tax. The number of people to whom the annual gift exclusion amount is applied is infinite, meaning if a grandparent has 3 grandchildren, and they all have student loans, a single grandparent could make student loan payments up to $19,000 for EACH grandchild, and they are completely covered by the annual gift exclusion. No action needed.
If there are two grandparents, you can double the exclusion per grandchild to $38,000, since they each have a $19,000 annual gift exclusion.
For example, Jen graduated from college with $35,000 of student loan debt; her 2 grandparents would like to pay off the $35,000 on her behalf by sending a check directly to the servicer of the student loan. Since the amount is under the $38,000 joint filer gift exclusion amount, a gift tax return does not need to be filed, and no gift taxes are due.
If instead Jen had $50,000 in student loan debt, we might advise her grandparents to remit the max gift amount this year ($38,000) and then as soon as we flip into January of the next tax year, they can remit the remaining amount ($12,000) which is also under the annual exclusion limit since it resets each year.
Gifting Over the Annual Exclusion Amount
If a student loan payment is made on behalf of a family member that exceeds the annual gift exclusion amount, a gift tax return would need to be filed in the tax year the student loan payment was made. This, however, does not mean that gift tax is due.
The IRS provides a “lifetime gift tax exclusion” amount of $13.9 million per tax filer, meaning each person would have to gift over $13.9 million during their lifetime before any gift tax is due. For a married couple, double that to $27.8 million. Thus, only the ultra-wealthy typically have to worry about paying gift tax.
Be aware that state gifting limits can vary from the federal limits, so depending on what state you live in, you may or may not owe gift tax at the state level.
While gift tax may not be due on the student loan payment that is made, just remember that if the student loan payment exceeds the annual gift exclusion amount, a gift tax return still needs to be filed.
No Tax Impact For The Person Receiving The Gift
When a cash gift is made or a student loan payment is made on behalf of someone else, the person with the student loans in their name or the recipient of the gift does not incur a tax event. It’s a tax-free event for the recipient. If gift tax is triggered, it is paid by the person making the gift, not the person who benefited from the gift.
Estate Planning Strategy
There are a number of estate planning strategies that can be implemented, acknowledging these gift tax rules.
For individuals looking to shrink the size of their estate – either to avoid estate taxes or just to begin gifting to family members - tuition payments offer a unique advantage. Since direct tuition payments do not count as gifts, this opens up the ability to make tuition payments directly to a pre-school, K-12 private school, or college that are in excess of the $19,000 annual gift exclusion amount in an effort to shrink the size of the estate or avoid the headache of the gift tax filing process.
If you want to make a gift to your child, grandchild, or other family member, but you do not want to give them the cash directly, making a payment directly to the student loan service provider can ensure that the gift is used towards the outstanding student loan balance, but it is still subject to the gift tax and reporting requirements.
What if you have some family members who have student loans, but others do not, and you want to gift equally? Option 1: Give each family member a check for the annual gift exclusion amount and tell them they can do whatever they want with the cash, apply it toward a student loan, fund a Roth IRA, down payment on a house, etc. Option 2: You can send payments directly to the loan service provider for the family members who have student loans and make direct gifts to the family members without loans. All personal preference.
About Michael……...
Hi, I’m Michael Ruger. I’m the managing partner of Greenbush Financial Group and the creator of the nationally recognized Money Smart Board blog . I created the blog because there are a lot of events in life that require important financial decisions. The goal is to help our readers avoid big financial missteps, discover financial solutions that they were not aware of, and to optimize their financial future.
