<p>Every now and then, a case is decided that has broad ranging implications. For years, I have warned people AGAINST co-signing loans unless absolutely necessary. In a recent case, the parents of a student co-signed a loan for their daughter, who incurred almost $75,000 in college debt. Sadly, the daughter died in an accident; however, the case held that the parents were still obligated as co-signers on the debt! If you do co-sign on a debt for a child, against my warnings, at least take out a life insurance policy on your kid in case of their death. Forewarned is forearmed.</p>
<p>If you co-sign and then you end up having to pay, can you also end up owing gift tax (if it’s big enough, and your covering the debt is construed as a gift)?</p>
<p>fieldsports, although you ask a good question of which I am not sure of the answer, I think there is no gift tax involved. This doesn’t sound like “disinterested generousity,” which is the standard for what constitutes a gift.</p>
<p>If you’re planning to help pay off the loan, buy some life insurance for yourself, too.</p>
<p>fieldsports:</p>
<p>Paying for college for your kid isn’t considered a ‘gift’ for tax purposes at the federal level - it’s exempted.</p>
<p>OP - There was a recent thread on this same topic -
<a href=“http://talk.collegeconfidential.com/parents-forum/1340009-college-debt-after-death-not-singular-concern.html[/url]”>http://talk.collegeconfidential.com/parents-forum/1340009-college-debt-after-death-not-singular-concern.html</a></p>
<p>The IRS website says,
"What can be excluded from gifts?
The general rule is that any gift is a taxable gift. However, there are many exceptions to this rule. Generally, the following gifts are not taxable gifts.</p>
<pre><code>Gifts that are not more than the annual exclusion for the calendar year.
Tuition or medical expenses you pay for someone (the educational and medical exclusions).
Gifts to your spouse.
Gifts to a political organization for its use."
</code></pre>
<p>Education costs shouldn’t affect the estate at all. Anyways, it’s not like if you give someone a gift you have to then declare it on your tax return and pay taxes on the gift. It only affects the estate after the gift giver dies, and decreases the amount that is tax free, what is the limit now-3 or 5 million tax free, I don’t remember. At least, that is my understanding of the “gift tax”.</p>
<p>Amen, taxguy.</p>
<p>Why those loans don’t come with built-in life insurance policies is beyond me. It is a really easy way to end up in a pile of financial hurt just when you don’t need it because of your emotional state.</p>
<p>
That’s basically right, but if you give more than the allowed amount in any one year, you are supposed to report that on your tax return. It is then counted against your lifetime exempt amount–which you could, in theory, use up and thus be required to pay gift tax while you’re still alive.</p>
<p>If you co-sign a loan and you end up paying, that wouldn’t be a “gift” anyway. When you co-sign, you’re on the loan.</p>
<p>so when cosigning a loan for anyone, student, elderly parent, etc. you are responsible in the event of their death?</p>
<p>Unless the loan stipulates that the loan is forgiven in the event of death, yes, as a cosigner, you are responsible. And that sort of “life insurance” is usually reflecting in the interest rate or other fee of the loan. PLUS has those provisions. If you cosign for car loan, and the car owner dies, you had better believe the lender will go after you for payments.</p>
<p>It’s more far reaching than even what is being discussed. The cosigner to a loan gets a credit check which is duly noted on the credit record. If turned down, that is an adverse thing already. If accepted, then the entire amount of the loan is on the credit record. If that cosigner wants to buy a car, a house or applies for credit of any kind, that loan is considered a debt on his record just as though he took out the loan. THere are situations where that can be a problem because we are not talking about a car loan that is diminishing in amount nearly right away as payments are being made on it, but about a student loan that is usually a lot more than that accruing interest until the student graduates and starts to pay on it, usually on a 10 year schedule. So that loan is on the cosigner’s record for as long as 14 years or even more if the student gets extensions on it. And it keeps increasing in size. Also when the payments do come due, years later, if the student has no job, insufficient income, is disabled, or anything, the lender will come to you and if you don’t pay, it goes on your credit record.</p>
<p>So it’s a big deal thing cosigning a student loan. It’s an increasing obligation that is usually for a lot of money and for a long time. Also it cannot be discharged for bankruptcy, or disability and sometimes even due to death.</p>
<p>A friend co-signed college loans for her son. As his graduation date approached, she contacted the lenders, hoping to confirm what had to be paid when, at what address, etc. The lenders would not talk to her as she was “only” the co-signer. The same lenders would, of course, take her house if her son did not pay. Has anybody else had an informational freeze-out from lenders?</p>