Will Getting an Inheritance or Large Gift Increase My Student Loan Payments?

Understand how your IDR is calculated. Know more about Adjusted Gross Income, and more.

Updated by Vidish S on 13th February 2020

Federal Student Loans have one major benefit over Private Student Loans and that is having repayment plans based on what you can afford to pay, and not what you owe. Such Income-Driven Repayment Plans are what allow Federal Student Loan Payments to stay reasonably affordable. Although there may be some problems for those who inherit some money or receive some funds unexpectedly. The good news is that for the majority of such people, the extra money won’t increase the loan payments, although there are some exceptions to this, payments can still be kept reasonable.

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Table of Contents

Calculating your IDR

Talking about Income-driven repayment plans, like IBR, leads us to the discussion of one key benefit of the IDR plans, which is the fact that these repayment plans have been designed in such a way that the loanees can afford their student loan payments, irrespective of the amount they owe. Thinking that receiving a large inheritance or financial gift will increase your monthly payment is not how it works. The formula used by the government for determining the amount to be paid is pretty simplistic, where the state of residence, size of the family, and the tax returns are taken into account and this info is used to determine your monthly payment.

The Adjusted Gross Income is very Important

One of the most important numbers on your tax return is the Adjusted Gross Income. Your income-driven student loan repayment is directly proportional to this number and increases or decreases along with it. Coming to the main point, if the inheritance or financial gift is treated as income, then it will impact the student loan repayments, whereas it will not be of importance if it isn’t taxed.

The Exceptions to the Norm

The same rules do not apply to all inheritances, unfortunately. One of the common examples would be those receiving a traditional IRA or a 401(k) inheritance, where the funds of the retirement account are not yet taxed and the taxes will be paid by the recipient. This might also result in the beneficiary of the IRA or 401(k) seeing a temporary one time jump in their Adjusted Gross Income(AGI), which can mean higher student loan payments. Here, a good accountant or tax preparer can provide options for dealing with the same.

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Bottom Line

Calculations done to determine a borrower’s ability to pay back on loans is fairly simple. It all boils down to the AGI on your most recent tax return. In most cases, your inheritance will not disrupt your student loan repayments but it is still suggested that you refer a tax filing professional or accountant to get the best advice.