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I’m Taking the Tax Benefit for My Father’s Parent Plus Loan

Written by Steve Rhode

Question:

Dear Steve,

I am in debt for around $100k from going to a private design school in Nebraska. I owe around $20k in Fedloans and $80k in Parent Plus loans that my dad signed for. I am paying I consolidated all of my loans as much as I could and opted for the lowest monthly payments possible. I pay $150/month in Fedloans and $530/month in Parent Plus loans with a 30 year consolidation on both.

What happens if I were to default on my Parent Plus loan? I’m not sure if it’s considered a private loan or a government loan. It’s also in my dad’s name since he signed for it, but I make the payments and collect the tax benefits. I wouldn’t want to ruin my dad’s credit for my loan default.

Jessica

Answer:

Dear Jessica,

The big issue here is the Parent Plus loans are not your loans. While you might have reached an understanding with your father regarding helping him make the payments, you are not obligated contractually on the loans.

The tax benefit is really earned by the loan holder. In this case that’s your father. If you were ever to be audited, that would require some explaining. The loan and interest are being reported to the IRS under his Social Security Number.

If your father is struggling to make the payments or his finances are tight, he may be eligible for the Income Contingent Repayment (ICR) program. Since the Parent Plus loans are already consolidated he could put the consolidated loan in this ICR program and his payment would be reduced to the lesser of 20 percent of his discretionary income or what he would pay on a repayment plan with a fixed payment over the course of 12 years, adjusted according to his income. But these income based programs can be a landmine. Read Why Income Based Student Loan Payments Can Be a Terrible Trap.

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After 25 years of payments the balance owed would be forgiven. Right now there would be a tax liability on the forgiven debt but Congress might change that in the future.

If you default on the loan then the servicer/collector will go after your father for payment. It will negatively impact his credit score.

Sincerly,
Steve

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About the author

Steve Rhode

Steve Rhode is the Get Out of Debt Guy and has been helping good people with bad debt problems since 1994. You can learn more about Steve, here.

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