- quote -

Was it terminated or just modified? Re-affirming doesn't
create a new debt, it underscores the validity of the
existing one.

Consider: A lends $5,000 to X, guaranteed by Y. X pays off
$1,000 then stops, and later files bankruptcy. A raises the
$4,000 remaining to $6,000 to cover fees, etc. as provided
in the contract.

Y should still be on the hook for $4,000 (his original
$5,000 less the $1,000 paid by X). (I'm ignoring interest,
all payments mentioned are principal.) It isn't fair to Y
that A and X can increase his debt, nor is it fair to A that
X and Y can decrease it (without both filing bankruptcy).

Seth

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The law of sureties and guarantors has long given particular
protection to persons who guarantee the debts of another,
particularly when the guarantor does so without adequate
compensation for the risk taken (i.e., the guarantor is not
acting as an insurer).

The basic rule is that the guarantor is only on the hook for
the debt that he agreed to, not for whatever subsequent
debts the creditor and the primary debtor might cook up
later on. In addition, the rules are designed to prevent
the creditor and the primary debtor from colluding against
the guarantor, e.g., by the creditor excusing repayment by
the primary debtor and, effectively, turning the guarantor
into the primary debtor and an unwilling donor who made a
gift of the borrowed funds to the erswhile primary debtor.

The specific details of the law will vary from state to
state, but generally the courts have given great protection
to guarantors and have viewed any significant modification
of a debt as excusing the guarantor, regardless of whether
the modification decreased or increased the risk of the
guarantor. Without doing a 50-state survey, I would hazard
a guess that at least a few courts have refused to excuse a
guarantor where the modification benefitted rather than
harmed the guarantor.

Thus, any action on the part of the creditor or the debtor
that is inconsistent with the terms of the deal that the
guarantor initially agreed to will generally relieve the
guarantor of his obligations unless the guarantor agrees to
the change in terms.

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- quote -

If there is a change in the underlying agreement that the
guarantor did not agree to, he is not bound by the change.
And he may be off the hook with respect to the original
agreement because it has been terminated in favor of another
one.

Stu

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- quote -

I don't see why the creditor should lose the guarantee by
the guarantor based on actions taken purely by the debtor.

- quote -

That's always been his status.

- quote -

Again, how can the guarantee just go away?

Seth

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- quote -

If that is what TurboTax says, then TurboTax is wrong.
According to the statute, if you became legally responsible
for payment on a student loan for your child where the loan
itself and your obligation were incurred when your child was
a "dependent" of yours, and you pay interest on that loan,
then you can deduct that interest for the year in which paid
(provided that the other requirements for deductibility are
satisfied). As such, the statute clearly contemplates
parents incurring student loan debts on behalf of their
dependent children, and provides the parents a deduction for
any interest they pay on those loans.

Furthermore, the requirement that the child be your
"dependent" only applies at the time that the debt is
incurred by you - i.e., when you signed as cosigner when the
loan was originally taken out. The fact that a child may no
longer be a "dependent" at the time the parent makes an
interest payment on the loan is irrelevant to whether that
interest is deductible by the parent; all that matters is
that the child have been a "dependent" when the loan (and
the parent's legal obligation to pay) was incurred, and that
the parent have a legal obligation to pay the interest.

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- quote -

I haven't researched this recently, but my understanding is
that it is difficult but not impossible to discharge some
student loans.

- quote -

That's true of deducting interest on student loans. But as
for qualifying tuition and related expenses, the deduction
can be made for the education of the taxpayer, spouse or a
dependent.

Stu

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- quote -

True enough, but if the primary debtor had reaffirmed the
debt, then (a) there is a distinct possibility that the
co-signor would be off the hook because (i) he most likely
did not reaffirm the debt (which is tantamount to making a
new debt) and (ii) the reaffirmation could be treated as a
modification of a debt that excuses performance by the
guarantor (in this case, the co-signor is most likely to be
treated as an accomodation party rather than a substantive
debtor, and thus accorded the status of guarantor rather
than primary obligor on the debt). As a result, the lender
would be able to look to the original debtor to pay the
debt, but would probably have lost their claim to require
repayment by the co-signor/surety, in which case they would
have sent the interest reporting form to the original debtor
who had reaffirmed the debt instead of to the
co-signor/surety.

On that basis, it seems reasonable to assume, in the absence
of further facts, that the OP's son did not reaffirm the
PLATO debt after his discharge. As a result, only the OP
would have a legal obligation to pay the interest.

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"Stuart A. Bronstein" wrote:

- quote -

Actually, his obligation on this loan was not discharged by
his bankruptcy, and to my knowledge would not have been even
if I had not co-signed it. The way I understand it, you
can't d/c *any* student loan by bankruptcy action.

Even though the instruction booklet is somewhat ambiguous as
to whether or not I can take the deduction, TurboTax
*clearly* says "the loan must be (or have been) for your own
education" (quoted as closely as I can from memory).

- quote -

I am fully retired and live on my military retirement pay;
he actually makes more than I do now.

Again, thanks **very much** to all who took time out of
their day to help. :-)

Dennis

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"Shyster1040" <Shyster1040[at]nospamhotmail.com> wrote:

- quote -

A discharged debt can be reaffirmed under bankruptcy law,
which revives the legal obligation to pay.

- quote -

That would certainly be the easiest way, and probably the
most cost effective as well, since the parent is probably in
a higher tax bracket than the child, so the savings would be
greater when the parent takes
the deduction.

Stu

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Under the facts as described, the OP is legally liable to
pay the loan since he was the co-signer, and, assuming that
the loan was otherwise a "qualified education loan" the OP
can claim a deduction for student loan interest paid. See
Treas. Reg. 1.221-1(b)(1).

Since the OP's son is no longer legally obligated to pay the
loan (I assume that was the effect of his bankruptcy), he
cannot claim the deduction because there must be a legal
obligation to pay such interest. See Treas. Reg.
1.221-1(b)(1).

It's not so much a matter of whether the OP "must" report
the amount because it was reported in his name, but rather
that the OP is the only person to whom such a deduction is
allowed. If the OP's son claims the deduction, the
deduction will be denied on the basis that Wells Fargo did
not report him as the payor, and the son will then have to
prove that (a) he was liable on the loan, and (b) the OP
made the payment and received the Form as the son's nominee.
Since the son is no longer liable on the loan, he won't
succeed and the deduction will be denied. This is not a
place where you want to play the audit lottery because it's
a fairly automated process now to cross-check student loan
interest deduction claims against reports from lenders.

If the OP wants to give his son the benefit of the
deduction, the OP should claim it and then give his son cash
equal to the tax benefit of claiming the interest. If the
OP is in the 20% bracket and the payment was $110, the OP
would then give his son $22. That's clearly within the
limits for excludable gifts.

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"Helpful One" wrote:

- quote -

This was my *non*professional interpretation, based simply
on the fact that Wells Fargo reported it to the IRS under my
name and SSN.

He is not my dependent now, and I honestly don't remember if
he was when the loan was originally signed, but I don't
think that matters a bit at this point in time.

- quote -

You think like me. :-) That was exactly what I was thinking
of doing.

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"Herb Smith" <smithff33[at]aol.com> wrote:
- quote -

Although, this doesn't address the OP's original question,
it does focus on the above response he received.

It would seem to me that if:
1) you were a co-signer for the loan, and
2) the loan has reverted to you, and
3) you are making the payments on the loan
then:
1) Your loan payments are being made to the lender in
fulfillment of your obligation, and
2) Are not a gift to your son and therefore, to the
extent that the loan qualifies for deduction, you
may deduct it whether your son is your dependent or
not.

However, if you want to let your son claim the deduction,
then
1) The loan payments become a gift to your son, and
2) you probably need to get an answer to your original
post,which I'll leave to the experts to do.

I might also suggest that if the value of the deduction is
only "a little over a hundred dollars not matter which of
you claims it", why don't you claim the deduction and then
gift your son the amount you will save in taxes.

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Dennis wrote:

- quote -

Is your son your dependent?

If not, you don't qualify to claim the deduction. Payments
you have made are considered gifts to him, with the payments
credited to him. If he is your dependent, you are legally
obligated to make the payments, and actually do make the
payments then you can claim the deduction.

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Years ago, I co-signed for a P.L.A.T.O. GRE loan for my son.
For reasons unimportant to the questions, he was forced to
file bankruptcy in late 2005, a few months after payments on
the loan were started. Even though the loan was not part of
the bankruptcy, shortly after it was discharged, I got a
letter from Wells Fargo informing me that the loan had
reverted to me *because* of his bankruptcy. Being the nice
dad that I am <G> , I had actually started paying it about
that time anyhow as my last gift to him regarding his
education.

Saturday, I got the annual interest statement on the loan,
and to my surprise, they note that it was reported to the
IRS under my name and SSN. Even though I had been paying it
in the past (2005 tax year), I let him take the interest
deduction on his return, but I don't see how we can do that
this year since they reported it under my name/SSN.

We're only talking about a little over a hundred bucks back,
no matter which of us claims it. It's just that I don't
know how nit-picky the IRS is on such matters.

The questions:

Can he claim it if I elect not to?

Is it legitimate for me to claim it under any circumstances,
or do I *have to* because it's reported in my name?

Should we get Wells Fargo to send an amended statement
showing his name and SSN?

Thanks to anyone who might answer.

Dennis

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