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I have a student loan in my name and I just got engaged (Yay!) about 2 months ago. My fiancée has been saving up and is really interested in helping us get out of debt before the wedding. I think we can do it but I would most certainly need her help.

Question:

Are there any tax issues (or any issues for that matter) with her transferring me money to pay off the loans or should I add her on my loans and directly take it out of her account? I don't want to make it seem like I made that money.

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12  
Note FAFSA is not a loan type. FAFSA stands for Free Application for Federal Student Aid. There are several different types of loans that could have used the data on the FAFSA to determine eligibility. They do have different rules regarding interest, the ability to consolidate.... – mhoran_psprep Mar 15 at 23:51
up vote 62 down vote accepted

Congratulations on your engagement, and on your desire to begin your marriage debt free.

Your fiancée can give you up to $14,000 per year as a gift without having to pay any gift tax. Above that, there are lifetime gift/estate tax exclusions that apply. You, as the recipient of the gift, do not pay any tax on it. (It is not considered income for you.)

Having said that, I would not advise the two of you to have her pay money on your debt before you are married. The reason is this: You aren't married until you are married. If something happens between now and then and the wedding is postponed/called off, you do not want to feel like you are in debt to her, and you do not want her to feel that she lost money because of you.

Obviously, you do not want or expect that to happen. So, instead, I recommend that your fiancée saves up her income. I'm assuming that the two of you don't want to go into debt paying for the wedding/honeymoon, so make sure that you have enough cash to pay for that. After that is covered, she can save money toward your student loans, but keep the money in a savings account. Once you are married, the money and the debt both belong to both of you. The day after the two of you get back from the honeymoon, she can write the check to pay off the debt, and you've got a great start to your future.

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@nod Entering a marriage with zero debt is great, but so is entering a marriage with a plan to pay off your debt in the first month of marriage. Also, I would not recommend holding on to a student loan just to try to prop up a credit score. I don't think it's a given that paying off debts lowers your score; there are lots of factors that go into that. – Ben Miller Mar 16 at 11:13
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Paying off a debt lowers your credit score? Is the logic; "this guy is bad news - he pays his debts and robs us of all that interest..." – Owen Boyle Mar 16 at 12:32
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"Once you are married, the money and the debt both belong to both of you." - depends on where in the world you are married. Community Property marriage is not necessarily the default everywhere and a pre-nup contract can also exclude it. – brhans Mar 16 at 14:31
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@brhans The statement might not be strictly true legally, but for all practical purposes it is true, especially if you are intending the marriage to last. – Ben Miller Mar 16 at 14:33
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@Relaxed I don't know about your marriage, but in mine, we share everything, especially when it comes to money. In my opinion, it is the best way. See this answer for more of my opinion why combining finances in a marriage is a good thing. – Ben Miller Mar 16 at 20:00

You don't state your age, debt amount, loan rate, and amount of retirement savings. These facts impact the strategy you pursue:

  • If your student loan interest is at low rate, it is more effective in the long run for you to prioritize 401k match contributions or Roth IRA contributions. Your student loan interest will be tax deductible.

  • You may be able to file taxes separately as a married couple. This will keep your monthly loan payments lower than if you file jointly, allowing you to do tax-deferred savings (401k/Roth).

I share the concerns about commingling your finances before marriage. You'll be married soon enough, and after that the $14k/yr gift tax concern won't even be an issue.

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Unfortunately, the loan rate is nearly 7% so this is much more then anything that i can get with investments. Our joint goal is to become debt free prior to marriage. This goal was mostly pushed by her and not wanting to take on debt for herself. – Phil Mar 21 at 14:32

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