Federal Direct Loan repayment & the IRS
October 2, 2013 9:29 PM   Subscribe

What are the potential consequences or complications of paying off your student loans all at once, "in cash"?

Let's say theoretically someone had a large amount of cash in a safe deposit box (not obtained illegally, but not by conventional means either), and wanted to use it to pay off their student loan debt to the tune of $40k or so.

1. Does the Dept of Education communicate with the IRS--would they notify the IRS that the loans had been paid off in an unusual manner (i.e. ahead of schedule/in a series of large payments)? How unusual is it to pay off one's loans in one fell swoop or a few fell swoops? Is it seen as inherently suspicious and/or would it trigger an audit, say?

2. What would be one's options for getting said cash to the Dept of Education without depositing it in their bank account? What if a few different people (non-relatives of the borrower) made payments to the account? Would this be noticed/considered suspicious, etc?
posted by désoeuvrée to Work & Money (10 answers total) 1 user marked this as a favorite
IMO it would not be wise to use that cash to pay off student loans, unless they are exorbitantly high interest, regardless of IRS complications. Pay off credit cards or use it to buy a car or make a downpayment on a house.

Also, if you owe taxes on the money, you should pay taxes on the money. The IRS is no joke. It wouldn't be responsible for anyone here to give you advice on how to avoid paying taxes.
posted by empath at 9:51 PM on October 2, 2013 [4 favorites]

Agree with empath here. Federal student loan interest almost certainly isn't all that much money. I'd also agree that you're really better off just paying the taxes. However, if you make double or triple payments, you'll get it paid off in a few years and no one will even notice.
posted by cnc at 9:54 PM on October 2, 2013 [1 favorite]

I'm choosing to view this in good faith and assume that you're not trying to avoid paying taxes or something, you'd just rather not get audited and are a bit paranoid about it.

1. To my knowledge, the DoE doesn't notify anyone if loans are paid off--and, at least within my limited sphere of knowledge, people paying off the loans in full isn't all that uncommon. I know more than a few students whose parents used part of an inheritance or their own cash to just pay off their children's student loans. There are lots of reasons middle-class people might find themselves with money they weren't expecting to have and then use it to pay off debt.

2. You could purchase a money order, or several money orders, and just mail them in? In the two instances I have personal knowledge of, one person's grandmother just sent a check to the loan servicer for the full remaining balance of the loan; another person's father called and made the payment over the phone. I really don't think paying off the balance in full is as unusual as you think it is.
posted by MeghanC at 10:40 PM on October 2, 2013 [1 favorite]

How unusual is it to pay off one's loans in one fell swoop or a few fell swoops? Is it seen as inherently suspicious and/or would it trigger an audit, say?

No, people do it all the time. You would need to write a check, get a bank draft or use your debit card if the transaction is within the bank's limits.
posted by DarlingBri at 11:29 PM on October 2, 2013

Regarding the loan payoff itself - I doubt it would even register as a blip on someone's radar. So much transactional stuff is automated these days - when you sent in the payment - via cashier's check or wire transfer or whatever, the machines would just do the electronic equivalent of stamping "paid" on the account.

Are you worried about converting the cash to a convenient instrument? Like a cashier's check or money order or whatever? You can buy a series of cashier's checks under $10K each, which prevents the bank (or whoever the issuer is) from having to notify the IRS. Use different banks if you're really paranoid.

You can also retain an attorney to advise you on this and handle the transaction for you. Your call.
posted by Thistledown at 5:05 AM on October 3, 2013 [1 favorite]

You can buy a series of cashier's checks under $10K each, which prevents the bank (or whoever the issuer is) from having to notify the IRS.

FWIW, this is a separate federal crime known as "structuring".
posted by ftm at 5:17 AM on October 3, 2013 [5 favorites]

Nthing that people do this all the time. I paid off a $10,000 loan in two $5K transactions with a debit card in a short period of time and nothing unexpected happened. The loan was paid off, I received a letter from the student loan servicer to that effect, and when I filed my taxes I sent in the 1098-E for interest paid. No adverse effects.

However, you should weigh the net benefits of doing this vs. investing the money or whatnot, as it might not be wise. But that's up to you and a different question really.
posted by epanalepsis at 5:46 AM on October 3, 2013

Best answer: Hi! I work at a company that make fraud detection software for banks.

The best way to do this is to make regular deposits into your bank account. Say $800 weekly. Then make loan payments from your bank account.

If no taxes have been paid on the money, you may want to claim it with the IRS. The IRS doesn't really care HOW you got the money, just that you pay taxes on it. If you draw it off in small installments, then claim it appropriately on your taxes, you can lessen your tax liability.

If you want to exchange cash for a negotiable instrument, simply take the cash to the bank and get a Cashier's Check.

USPS Money Orders have a limit of $1,000.

The other thing you could do it take cash to Western Union and wire it to your loan servicer. TRUST me, they'll except it.
posted by Ruthless Bunny at 6:10 AM on October 3, 2013

Recent federal student loans are not as cheap as they once were-- subsidized loans, which are available in very limited amounts, are at a minimum of 3.4% interest, and many recent loans have a rate of over 6%. Unless the asker is at the right time/place in life(e.g. planning on living in the same size place for the next several years in a market with a favorable buy/rent ratio) to want to use the money as a down payment, paying down student loans will often make financial sense. But mortgages and auto loans are significantly cheaper than many federal student loans these days, assuming the asker has good credit.
posted by akgerber at 12:38 PM on October 3, 2013

Response by poster: Yeah, as akgerber noted, the loans in question are at 6.8%. Thanks everyone for the info so far! Much appreciated.
posted by désoeuvrée at 6:09 PM on October 3, 2013

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