Great question Barbara. It appears that the short answer is "No, it is not exempt from gift tax."

Internal Revenue Code Section 2503(e) states that a "qualified transfer" (i.e. gift) means "any amount paid on behalf of an individual as tuition to an educational organization for the education or training of such individual."

That's government language meaning that the check must be written directly to the educational institution for tuition only. Payments for books, supplies, dorm fees and meals do not qualify.

If the school loan includes all of these other fees wrapped into the loan amount, then that would presumably be a no-no, in addition to the fact that a lender is not an educational institution.

The silver lining in all this, however, is that you could still pay up to $13,000 on the loan this year for your son, or $26,000 if your spouse (assuming you're married) kicked in his share. Then in 2010, you both could pay up to another $26,000 towards the loan and you'd still be within the annual gift tax exclusion amounts and would not owe gift tax on those payments. Note: I'm assuming here that 2010's gift exclusion amount is the same as 2009.

You may want to hire a CPA for an hour to get these or other answers you may have confirmed.

If you help your son pay off his loan, the amount you pay will NOT be exempt from gift tax regardless of whether you make the payments to your son or to the lender. As Walt said, you can take advantage of the annual gift tax exclusion to avoid paying gift tax if you keep the payments below the annual limits.

Also, note that you will not be eligible for the student loan interest deduction even if your payments include interest. This is because only the borrower legally obligated to make the payments can take the deduction. If you make payments of interest on his loans, he will be the one eligible to take the student loan interest deduction.