formally lending college money to your own kid?

Parent Cafe
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<p>Has anybody done this, or considered it, with a written promissory note and payment schedule? </p>

<p>The situation: family is full pay, and has saved up to spend an equal amount on each kid, which will get them through state school. The kids are not academically distinguished, and will not get meaningful merit aid (meaning enough money to put them at the state school price, anywhere that's at least as good as the state schools.) </p>

<p>One kid wants more money, in order to go beyond the state college system, for curricular and personal reasons that are understandable but not essential. The other kid has been a good sport about making compromises to work within the budget. The parents can lay their hands on some additional cash to help, but cannot just add it to the college budget as an additional gift, because (a) they have retirement plans for that money eventually, and (b) they would want to do the same for both. After all, the other kid is equally deserving, and could certainly transfer to preferable places, if money is being handed out.</p>

<p>The kid who wants more could take the unsubsidized $5000 loan, of course, but with the drawbacks: several percentage points charged on origination, repayment while the kid is still in school, and onerous penalties if there are repayment problems. Mom and Dad could lend on kinder terms. They would want the promissory note so that both kids understand this is not just an additional gift to someone who refused to find ways to compromise and adapt to the budget.</p>

<p>Older generations of the family have done inter-generational loans with promissory notes, and it went well. Everybody honored their obligations on time. Of course, they were the great depression and WW2 generations, and they were pretty good about meeting obligations. There would probably be a repayment schedule, starting a reasonable time after graduation, and the understanding that repayment would be accelerated if the kid came into unexpected money. The loan could always be forgiven if the parents' finances improved in a way that would permit them to do that, if they could also do something equally nice for the other kid at that time.</p>

<p>I realize that not all families are committed to keeping the funding equal among kids, but this family is, for various reasons. Any thoughts?</p>

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<p>Are the parents willing to sue the child if the child doesn’t pay? The promissory note is only good if they are willing to enforce it.</p>

<p>I say borrow the money through the regular channels. Never lend a family member money you can’t afford to walk away from.</p>

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<p>Only lend to family what you can live with not getting back. (I see above poster said same thing). How will it impact your relationship if there’s a problem? Only you can make that decision.</p>

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<p>It’s not a good idea to loan money to family, with or without the paperwork. </p>

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<p>Agreed…only lend this money if you really don’t need to see it again.</p>

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<p>My parents lent us $35K so that we could buy our first house. We had a regular loan agreement, and paid just under market interest, which at the time was in the double digits. We paid regularly every month, then paid the balance off years early. No problems whatever.</p>

<p>We lent our son money to go to grad school and subsequently buy a car to use for his first job. He has begun making his payments. (In his case the situation is different, because he is an only child.) I don’t anticipate any problems.</p>

<p>I lent my sister & BIL a substantial sum a number of years ago. They paid me back in full as soon as they could.</p>

<p>My mother always says that if you loan someone money, you have to have a repayment schedule, even if it is $10 a month. I agree.</p>

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<p>I personally do not like the idea of lending to family members. I would consider it an unneeded complication. However, if your family has enough money where this is a reasonable possibility then I don’t see anything wrong with having a note on paper. Assuming that no one is actually unwise enough to push the limits of such a note payable by either refusing to pay or threatening to sue someone for missing payments (!) then it would be a good idea just to help encourage some financial discipline while keeping the kid out from underneath the loan sharks at Nelnet. That former point is very important to me though – if this is going to something that leads to drama and fighting later on then I wouldn’t do it. You know your kids and your family dynamic better than anyone else so it’s really you who can best predict whether or not setting up a formal loan with your kids would be responsible or a recipe for a disaster.</p>

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<p>I don’t like the idea of kids borrowing money from parents for undergrad. </p>

<p>It’s too hard to know at this point how much the child will be earning upon graduation.</p>

<p>Also, 18 year olds usually don’t really understand the impact of these loans. At this point, they want what they want.</p>

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<p>^^ I agree with M2CK. While I borrowed money for a car, about $15,000, 1) that was a far smaller amount of money and 2) I already had a job and was able to show I could repay the loan. Like Consolation, I had a repayment schedule with an interest rate lower than car loans but higher than what my parents would get in a CD. </p>

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<p>We’ve actually made this offer, verbally, to our 3 children. We are full pay, but not financially able to commit to paying the really big bucks. We ran the numbers, figured out how much we could actually afford to pay for each kid equally, and gave them the number, letting them know that if they picked a school above this number we would loan the additional needed (we would have official terms and a signed contract). We feel this is something we can afford to offer our kids, and that it can be done fairly and without causing long term family strife.</p>

<p>So far, D1 chose a school with significant merit, well below the number we gave her. S chose a state school, so good there as well. D2 is just starting to seriously look, so we will see.</p>

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<p>We have considered this for the future. We have college savings plus extra money. The kids know that if they go over the 529 amount, it will require money from them, At first I thought loans were a good idea even if we parents paid it off at graduation. Then I saw there is a loan origination fee so it seems like a waste of money just to teach a lesson.
I would rather “loan” the money knowing that we took take the loss, than co-sign a loan </p>

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<p>My husband’s grandmother did lend her son money to buy a business, buy a home and each time has legal papers drawn up. The amounts with any accrued unpaid interest were taken out of his share of his inheritance when she died. </p>

<p>For what a person considers small amounts, that one spends with variation and without meticulous checking for fairness and equality among the children, that might be over kill. I know none of my kids have gotten what I consider outrageous amount of our money to the point where we felt it had to be balanced out what they would inherit from us. But YMMV, as different people look at this differently. But for large amounts, for equality, internal parity, some such provision might be useful.</p>

<p>I think the Student Direct loan is a great starter loan. Student does NOT have repay it while in college. Required repayment starts 6 months after no longer a full time student Not bad interest rates, especially for a someone with no job history and credit history, and flexible repayment terms when down on luck. Can’t get much better. My one son took part of what he could borrow and did pay it back within a year, and learned first hand how difficult it was to do so. I just consider the loan origination fee part of the interest. Also, so many kids have this loan, so it hardly makes anyone an outlier. Even kids from well to do families we know have taken the unsubsidized Student Direct Loan. </p>

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<p>“My parents lent us $35K so that we could buy our first house. We had a regular loan agreement, and paid just under market interest…”</p>

<p>Same, except ours was interest free. It was a very formal agreement (father is a lawyer.) Also, just in case something happened to my parents while loan was still outstanding, the balanced owed would have been subtracted from of our share of inheritance. </p>

<p>They loaned my sister money for her first house, too. </p>

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<p>Just curious…if you don’t have the resources to pay for,the college…where will the loan money come from?</p>

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How about grad/professional school? Are you and your (grad/professional school) child OK with this?</p>

<p>I had such a thought but I could not get myself to do this.</p>

<p>Actually, we co-signed some of DS’s grad school loans, paid the “parent’s contributions” (sometime I feel that the school is on the child/student side rather than on the parents’ side because they try to ask the parents to pay as much as possible so that the student’s debt will be lower - this may be why the student loans of a private prof schools are not much larger than the loans of a public school kid - maybe on average, parents of private schools at every educational level, have more financial resources after all - but not me!) and we also started to pay the accrued interests so that the loans will not get larger. But we were thinking whether we should “help” more substantially even though we think we may not be able to afford it with the retirement on the horizon.</p>

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<p>I do not think it is a good idea to loan to a family member if other options available. We plan to spend much more on a child 2 education then on child 1 due to variety of reasons, but we did help child 1 with down payment on his first house.</p>

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<p>@mcat2 The interest rates charged to graduate students are usurious IMHO. We were able to lend him the money he needed to bridge the gap between money he could contribute and the COA by drawing on a HELOC. (Luckily, our house is still worth significantly more than we paid for it. Housing prices around here didn’t take the huge dive they did in some places, probably because they were never as inflated.) The different in interest rate was about 5 percentage points, IIRC.</p>

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<p>The school is on the school’s side, to be honest. It’s not that they like your children more than you, it’s just that they know that you likely have more money than your college-age children and they want to get as much of it as possible.</p>

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<p>It depends on the kid’s character–how likely is the kid to pay back? My parents loaned my two older sibs money for college, they all signed papers on it. It was a good deal for my sibs because the interest rate was lower than what banks charged back then. They paid back, and had no problem finding employment right after college (engineering and accounting majors). Four younger kids got through on work-study/scholarships and ROTC. My parents lent me and H 5K when we were in grad/professional school. Just to make it through those times that loans/paycheck didn’t come through in time to pay the babysitter–so I wouldn’t have to embarrassed, calling her up to borrow a small sum every month or two. We owned a house at the time. When we sold the house, we paid them back in one lump sum. (Mom was surprised and pleased.) We also borrowed money for a down payment on a house from my sister (the accountant). Win-win–she made more interest/we paid less interest. She knew we had the income/trusted we would pay back on schedule, which we did. We also borrowed money from a friend for another house. Both of these loans were about 20K. (Scary to think they trusted us with that much!)
We have loaned small amounts of money ($700-800) for travel and car repair to friends who were in tight spots. We did this knowing they might not pay back. Actually, the one we thought we might have trouble collecting from showed up at our door with cash. The guy who actually made a payment schedule of $50/mo made one payment and never sent another. Still keeps in touch with H, with no mention of $ owed, no shame apparently. </p>

<p>We have given our kids very unequal amounts for college. But the idea is that they will all get out of college debt free–through scholarships or our support. We promised cars as graduation gifts to those who took full rides. Those who got more now will get less later. </p>

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<p>Grad/professional school is very different. At that point, a parent is rather sure what the child will be earning upon graduation. </p>

<p>My former OB/Gyn borrowed his med school costs from his dad, and then paid him back. I’m sure his dad thought that was a low-risk loan because he could be confident that his soon-to-be-MD son would be earning enough to pay back the XX amount borrowed. If his child were borrowing for undergrad, who knows what is going to happen.</p>