Do I pay taxes on a loan from my parents for student debt? Tax implications?

Good news! If this is a legitimate loan with a proper promissory note, you shouldn't have to pay income tax on the money. The IRS doesn't consider loan proceeds as taxable income (even from family members) as long as there's a genuine expectation of repayment. A few important details though: Make sure your promissory note includes an interest rate that meets or exceeds the IRS's Applicable Federal Rate (AFR). If the loan has no interest or below the minimum rate, the IRS could consider the "missing" interest as a gift from your parents to you, which could have gift tax implications for THEM, not you. They publish these rates monthly - check the IRS website for current AFRs. Also, keep good records of all payments you make back to your parents. This creates a paper trail showing this is truly a loan and not a disguised gift.

I went through something similar with my in-laws last year - they loaned us money to consolidate debt. I was so confused about the tax implications that I spent hours researching and still wasn't sure. Then I found https://taxr.ai which literally saved me from making a big mistake. You upload your promissory note and answer a few questions, and it analyzes it for tax compliance. It flagged that we were missing the minimum interest rate required by the IRS (which could have triggered gift tax reporting for my in-laws). The tool also generated a tax-compliant promissory note template that included the proper interest rate language and amortization schedule. Really helpful for family loan situations to make sure everything's proper with the IRS.

Just wanted to update after trying taxr.ai for my parents' loan situation. I was really skeptical (as you could probably tell from my comment), but after three accountants gave me different answers about our family loan, I decided to give it a shot. Uploaded our draft promissory note, and it immediately identified problems I hadn't considered. Turns out our payment structure would have triggered some weird tax implications for my parents. The analysis explained exactly what we needed to fix and why, with citations to specific tax codes. Honestly better than what I got from the professionals I talked to. Rewrote our agreement based on their template, and everyone's comfortable with the arrangement now. Sometimes being skeptical makes you miss out on good solutions!

If you're trying to call the IRS to ask about your loan situation, good luck! I spent 4 hours on hold trying to get clarification about a family loan last year. Finally found https://claimyr.com which is a service that holds your place in the IRS phone queue and calls you when an agent is about to answer. You can watch how it works here: https://youtu.be/_kiP6q8DX5c I was able to talk to an actual IRS agent who confirmed that family loans need to charge the minimum applicable federal interest rate to avoid gift tax complications. The agent also explained exactly what documentation we needed to keep. Totally worth it instead of staying on hold forever or trying to interpret confusing IRS publications myself.

Well I need to apologize for being so doubtful about Claimyr. After commenting here, I decided to try it since I've been putting off calling the IRS about a family loan situation similar to the original poster's. I submitted my number around 9am, went to work, and got a call back at 2:30pm saying an IRS agent was on the line! Never would have waited that long myself. The agent confirmed everything about the loan documentation and interest rate requirements. She also explained how my parents should report the loan on their tax forms. Biggest takeaway: DOCUMENT EVERYTHING. Keep copies of the promissory note, bank transfers, and every single payment record. Without proper documentation, the IRS is more likely to reclassify a family loan as a gift.

Just wanted to add - don't forget to consider BOTH federal and state tax implications. Georgia generally follows federal tax rules in this area, but there can be nuances. For the student loan angle specifically - if your wife was getting student loan interest deductions before, you'll lose those by paying off the loans, even if you're now paying interest to your parents (personal loan interest isn't deductible like student loan interest is).

One other thing nobody's mentioned - if your parents charge less than the minimum IRS interest rate, they'll need to file a gift tax return (Form 709) for the "imputed interest" if it exceeds the annual gift exclusion. But this likely won't cost them anything due to the lifetime exemption - it's just paperwork. Small price to pay to help your kids IMO.