<p>If the parents would like to help pay for the interests of student's Federal loans while (s)he is still a medical school student in order to prevent the loan amount from growing, how do they do that? I remember receiving an email asking us to set up an online account. Do we pay to that online account? Can we pay the principal a little bit in the same way (if/when we can afford)? It is the unsubsidized Staffold and Perkins loans I am talking about here. (It seems the latter loan is "better".)</p>
<p>I believe it is not tax deductible for this interests payment, because the borrower is the student, not the parent. Is it right?</p>
<p>I apologize if this is a really dumb question. I am very ignorant about student's loans. The only loans I am very familiar with is the mortgage and car loans.</p>
<p>I am thinking you would be better to give the student some cash to minimize the loans taken out. So if you were going to pay $1000 toward interest, instead, just tell the student to take $1000 less in the current year, leaving the loan amount as is. There are origination fees etc, so it would be more cost effective, I think, to reduce the current loan to be.</p>
<p>Oh, and then the student can pay down the interest when they have income and have the benefit of that deduction, too.</p>
<p>I have not thought this through, but that is my first impression</p>
<p>As somemom suggested it may be more advantageous to make payments towards tuition directly rather than paying off the loan’s interest or principal.</p>
<p>Any payments you make on the student’s behalf will be construed as “gifts” by the IRS and will count against your estate’s lifetime limits on gifting. (Right now the lifetime limit is around $6M, I think; however, the amount changes every year, depending on the whims of Congress, and has been as low as $150,000 within the past decade)</p>
<p>Any payments made directly to an educational institution does NOT towards the lifetime limits. </p>
<p>Payments to educational institutions also avoids gift tax liability on the part of giver.</p>
<p>I appreciate your input. Both of you have very good points.</p>
<p>In addition to the federal loans, DS has an institution loan which he could either have it all or none at all. He could not borrow only a part of it. No interests is acrued as a student AND as a resident (the latter seems to be quite unusual), but after residency, the interests rate is several points higher than that of unsubsidized Stafford loan.</p>
<p>The most advatages currently is taking equity loans. % is much lower than Federal loans and you can pay as fast as you want. You are in full control.</p>
<p>I think I mostly consider student’s loans as a means to help with the cash flow (in the next several years) by paying some interests.</p>
<p>Because of student’s loans, all of a sudden, you could have a lot of “cash reserve” to draw from if needed. This is especially true for those loans having no interests to be acrued and to pay while in school – This is almost like a line of credit for 4 years with zero interests. But you need to be disciplined enough to not spend all or too much of it.</p>
<p>We do not pay much attention to the issue of the person on the hook.</p>
<p>However, we care about DS’s feelings if he is deep in debt. This leads to the question of how to pay back some of the loans or their interests while still in school or in residency if we can afford it.</p>
<p>An analogy is that, from the financial point of view, it is better to put money into your retirement account (e.g., IRA) at the beginning of each tax year. But for the “emergency fund” point of view, many choose to put in the money right before April 15, just in case this money is needed during the year.</p>
<p>If you compare the follwing two cases:</p>
<p>1) Put in, say, 5K, at the beginning of each tax year.
2) Put in the same on next April of each tax year before the tax report is due.</p>
<p>The family who chooses the case 2) always has 5K in their emergecy fund than the family who chooses the case 1).</p>
<p>Student 1) has 5K no-interests-while-in-school loan each year.
Student 2) Does not have these kinds of loans.</p>
<p>Assuming that student 1) does not spend the money which he gets from the loan, student 1) will have 5K, 10K, 15K, 20K emergency funds during his first, second, third and fourth year, respectively.</p>
<p>If a student does not get such a loan (i.e., no interests acrued in school), he just needs to pay the interests in order to have the money at his disposal.</p>
<p>Of course, if your family is resourceful enough, you do not need this at all.</p>
<p>I think NCG, after he had done some math on the MS student’s debt level vs the COA, he concluded quite many parents help paying at least a part of the cost.</p>
<p>Recently I saw some statistics that, for the medical school students who graduated in 2011, 25 percents of the graduates from medical schools do not have any debt. I do not think there are so many MD/PhD students, or so many students who have earned a lot (e.g., in the i-banking industry) for several years before they go to medical school. If I can make it a guess, it is more likely the parents use this to pass on their inheritance (as a gift) in this way.</p>
<p>So, among your classmates in medical school, it is quite possible that one in four are debt-free. Top N percenters may also “invest” in their child’s education and future career unless their child really does not want to be there. (Interestingly, the real elite like Chelsea Clinton was (or may still be) a board member of a prestigious medical school in NYC, and she had never been a premed! She may have a better idea on how the medical school education should be because of her growing-up environment, not because she had been through the orgo lab.)</p>
<p>MCAT,
I’m not sure if it is exactly the same, but we pay our son’s undergraduate loan interest for him currently so it will not build up, as you mentioned in your original post. When the loan was originated we elected to do that and we get a quarterly paper bill, which we then pay on-line. On the topic of equity loans, we’ve also declined some Unsubsidized Federal Loans, opting to use an equity loan for much lower interest. The end result of mixing this and that with two of our boys in college (and another coming up the road), is a solution that we can work with in our family. It differs quite a bit with most families depending upon their financial values and circumstances. I actually went to our bank and had a meeting with the manager regarding student loans (and their high interest) vs. home equity loans. It was really helpful in making our decisions. The manager did say that many parents are opting to do this now as it makes the best financial sense with some families. Paying the interest for our son’s loans now will help to lessen his future debt. </p>
<p>Good luck. I’m sure there are many different ways to help out that will work well. I’m not sure what a financial adviser would say, but then again, I don’t think we’d change too much we’ve done so far. ;)</p>