New York Times, Morehouse Graduates’ Student Loans to Be Paid Off by Billionaire:
The 396 young men began the day as students in caps and gowns, ready to graduate from Morehouse College — full of hope, but burdened in most cases with the debts that financed their education.
Then their commencement speaker went off-script with an extraordinary pledge: the newly minted alumni of the historically black college in Atlanta would go forth into the world student debt-free.
Robert F. Smith, the billionaire investor who founded Vista Equity Partners and became the richest black man in America, told the crowd that he and his family would pay off the entire graduating class’s student debt, freeing them to begin their next chapter, whether it was a master’s program, a position with Teach for America or an internship at Goldman Sachs, without loan payments to worry about. ...
“We’re going to put a little fuel in your bus,” Mr. Smith, dressed in academic regalia to receive an honorary doctorate, said near the end of his address on Sunday at the school’s 135th commencement service. He turned to Morehouse alumni in attendance and abruptly issued a challenge.
“This is my class, 2019,” he said, personally claiming the graduating seniors as his own. “And my family is making a grant to eliminate their student loans.”
It seemed to take a moment for the immensity of what he had promised to sink in. Then the place erupted, as the senior class, all male and mostly African-American, shook hands and hugged one another in glee. ...
He did not inform Morehouse’s administration, employees or students in advance, and many in Mr. Smith’s own inner circle were surprised by the news.
Forbes estimates Mr. Smith’s fortune at about $5 billion, built mainly through Vista Equity Partners, a private equity firm that focuses on buying and selling software firms.
Kelly Phillips Erb (Forbes), Billionaire Robert F. Smith Promises To Pay Off Student Debt Worth Millions:
With their debt now discharged, what happens to the students? Besides the yelling and screaming and sighs of relief, of course. What about the tax consequences? And here's where the students get another break: I don't think there are any. ... I believe it's a gift.
The IRS defines a gift as "any transfer to an individual, either directly or indirectly, where full consideration (measured in money or money’s worth) is not received in return" based on the gift tax provisions found in the Tax Code beginning at section 2501. In the business, we like to say that gifts are given not for anything in return but out of "love, affection, respect or admiration."
The recipient of a gift isn't subject to federal income tax on a gift. And if any gift tax is due, gifts are subject to the federal gift tax rules, which means that the giver, not the recipient of the gift, is responsible for the tax. In other words, the recipient of a gift - in this case, each student - isn't responsible for paying tax (income or gift tax) on the gift.
As for Smith? The annual gift exclusion amount for 2019 is $15,000 per person. That means that if the gifts were made directly to the students, Smith would be able to exclude $15,000 per student ($30,000 if he splits gifts with his wife, Hope). Gifts over that amount would typically be considered taxable gifts (meaning taxable to the donor). Some Morehouse students reported that they shouldered loans of close to $100,000, more than the annual exclusion amount — but it appears that won't matter. When Smith told the class about the gift, he stated that "my family is making a grant to eliminate their student loans." In other words, it sounds as though the funds are payable as a grant through the college which likely mitigates any gift tax consequences.
If Smith had paid the tuition of each student directly to the college as they went, that would have not have been considered a taxable gift. That's because checks written directly to a qualifying educational institution for tuition or to a health care provider for medical expenses are not subject to the gift tax even if they exceed the annual exclusion. However, the educational exclusion is only for tuition and not for books, supplies, room and board, or similar expenses (those would be taxable gifts).
Update: Bloomberg Law, Billionaire’s Gift to Morehouse Students Could Bring a Tax Hit