D20 is fortunate in that she will not need loans for her education–between her scholarship and what we can cash-flow I feel confident about our ability to to cover her remaining two years of tuition/living expenses. We had filled out FAFSA when she was first applying to schools, but have not bothered since.
As I’m starting to think about our budget for D24’s education, it has occurred to me maybe we should be taking advantage of the loans D20 is eligible for (federal, unsubsidized) in order to have more money available for D24. At this point, since I can’t turn back the clock, it would be the $7500/per year for the next two years. I don’t have much confidence that D24 is going to have the same generous merit options available to her that D20 did, so I’m already assuming she will need to take the federal loans to supplement what we have saved and will cash flow. We are unwilling to take on private loans.
I know that loans taken for D20 will begin repayment while D24 is in school, but other than that…are there other things I should be aware of? We plan to to pay any federal loans back ourselves, so I wouldn’t be saddling D20 with a financial obligation, but I suppose there would be some impact to her financial picture…
Finally, is it completely unethical to do this?
Money is fungible, so the ethics of what you are considering can get a bit fuzzy. If by “banking federal loans” you mean taking the loans in D20’s name and then setting the loan funds side for use by D24, I don’t think you can do that strictly from a logistics standpoint, and, at least for me, that would raise ethical concerns. My understanding is that federal direct loans are administered by the borrowing student’s college, and the borrowed funds go directly to the school to pay billed expenses. In this case, what you would be “banking” is your own money that you would otherwise be cash flowing to pay D20’s expenses that are now paid for with the federal direct loans. I personally see no ethical issue doing things this way, as you are planning to pay back the loans yourself.
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What happens if the loan amount is more than the billed expenses from the school? The majority of expenses for D20 will be rent for her off-campus apartment.
Technically, financial aid is to be spent on the student who borrowed the money. I assume you will be swapping out loans for your own money that you would otherwise spend on that student’s educational expenses, thereby leaving more of your own money to be spent on the next kid. Fine. But keep in mind: The loans are in the student’s name, so be sure that the student understands what they are borrowing. And interest begins accruing as soon as the loan funds are disbursed.
You may see more people taking this route if there is broader student loan forgiveness.
Unless the loans are subsidized would there be the disadvantage of paying 4 years interest on a loan you didn’t need?
Certainly, paying interest on a loan that you do not need is not appealing. OP will have to determine if taking federal direct loans for the stated reason is the best course of action.
Life Insurance. God forbid. What if something happens and you can’t pay off the loan you intend to pay off? Disability insurance- same deal.
It’s one thing if each kid is on the hook for their own loans (even if you want to help them by paying them off). It’s another thing to leave one kid holding the bag if something happens to you and they are liable for a siblings loans.
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Unless I’m misunderstanding, it sounds like in essence what you want to do is use your daughter’s credit to cash flow part of your younger daughter’s education with the promise of paying it back instead of you getting a private loan?
That’s big risk; maybe I’ve experienced too much “life,” but one thing you can rely on is Murphy will be there every step of the way. Keep in mind if something happens, illness, job loss/downsizing, death…your D20 is the one who is on the hook; this is her financial life. One late payment can affect her ability to buy a car or a house at a decent rate; late payments can affect her ability to get a job, as many jobs require credit checks. Is it possible for your younger daughter to find a college in HER budget?
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