<p>I really liked the approach the parents of a friend of mine took to help their daughter buy her first condo. They were financial position where they knew they would be leaving their kids some money as inherentence (in the future)and had money invested in a variety of vehicles including conservative ones. They decided they would like the "inheritence money" to be used now ... but not be a free gift ... so they came up with this.<br>
* They loaned their daughter the down payment from her inherentence and even had a loan agreement drawn up.
* The interest rate was prime +1% ... which was more than the parents were receiving on their conservative investments (CDs and bond funds)
* However the only payments were for interest ... nothing on the principal was required.</p>
<p>Pretty clever ... invest in your kids instead of MongoBank, the parents earn more than they would have, the child's monthly cash flow is much better than it would have been, and the money loaned is essentially the kid's money anyways ... brilliant.</p>
<p>How is 6% below market value? One year CD jumbo rate is 3.6%, and then he would have to pay tax on the interest earned. Opportunity lost to father is not 6%. He is making money off his son.</p>
<p>On top of the financial aid implications involved in loaning education money to your children, there are federal tax law implications for making loans at below market rate, and also for making monetary gifts (even if the gifts are for the education of your independent, for tax purposes, child). The following is a clearly stated response from a CPA to a woman who asked about loaning money to her daughter at 5% interest:</p>
<p>**The loan itself would not create a tax issue. However, since you would be loaning the money at less than market there is the issue of "imputed interest."</p>
<p>The way this works is that the difference in the applicable federal interest rate and the rate charged is considered imputed interest. This is treated as you making a gift to her in the amount of imputed interest. She in turn is considered to be paying you the market rate. This means that you have income in the amount of the interest she actually pays you plus the amount of imputed interest.</p>
<p>If you made it a gift, there is an annual exemption from gift taxes of $12,000 per person per year. Any amount above this is considered a taxable gift. However, it is unlikely that any tax would be due as there is a $1,000,000 lifetime exemption. Since the $50,000 is a gift, there are no income tax consequences.</p>
<p>Hope this helps.</p>
<p>John Stancil, CPA** </p>
<p>That being said, even if I was no longer claiming my child as a dependent for tax purposes, if I was in a comfortable financial position I would find it personally untenable to loan them the money they needed for school. I would just make it a gift and take whatever tax consequences may come my way.</p>
<p>I've never subscribed to the notion that the "best" way of teaching my kids about finances was to throw reality in their paths. :) I prefer to provide them with a model of how they should make their money decisions, and part of that model includes being generous if one is able.</p>
<p>Personally I think 6% is too high considering that this loan is for schooling... in terms of some sort of benchmarking I'd say charge what a CD would give you and that way you could say the dad isn't losing any money.</p>
<p>I'm also in the minority. I think loaning money and charging interest is fine. </p>
<p>My father loaned me money at one point in time for a mortgage. We handled it just like any other mortgage. Note, mortgage recorded at the registry, interest, etc. I paid it just like any other mortgage. When I refinanced, he got almost all his principal back, since the payments I'd made were mainly interest payments (the way mortgages amortize, the payments are mainly interest the first years). </p>
<p>It seems perfectly fair to me. My father no longer had access to that cash. That alone was reason enough to charge interest.</p>
<p>My D. is far from Grad. School - she is going to be a Sophmore in undergrad. However, her plan is involeved Grad. school. Since she is trying extremely hard to keep up her GPA to keep her Merit Scholarships and actually obtained much more of scholarship money for next year, we already promised her to help thru Grad. school as much as we can, no loans. I would be more than happy to do so, although I pointed out to her that we are much older than average parents and if we loose our jobs or health, than this goal will become more challenging to accomplish. But we will try our best!</p>
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Our son is appalled that " dad wants to make money off me"
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<p>Well, he doesn't have to take the loan...</p>
<p>However, my answer to the question posed is "no" because I feel it could degrade the relationship. Perhaps co-signing a bank loan would be a better idea and still accomplish your husband's goals?</p>
<p>^ It probably depends on your previous experience and background. We supported completely our S thru undergrad. He did not go to Grad. school. He thanked us forever, saying that a lot of his friends were paying off their loans and had very hard times. He and his wife started out clean and consider themselves very lucky. He never asked for a penny from us after graduation. I heard very opposite stories from other parents, kids asking for financial help after being done with school, and even moving back to live with their parents. We use our experience with S to deal with the current kid in college - our D. We will try to help her financially as much as we could.</p>
<p>I borrowed money from my grandmother. It wasn't for grad school. It was for my first car after college graduation. I wasn't earning enough to qualify for a traditional loan. </p>
<p>That loan went with a signed contract. And I paid interest. At no time whatsoever did I resent the formality of it all. Never did I think "oh, Mimi just wants to make money off of me." Good grief. I was so grateful for the help I thought I was getting off lucky. </p>
<p>But, I come from a family where money is a very common item. We discuss it openly, share ideas, and strategies. It's not taboo or private or sensitive. It's a tool. We're not rich. We're just careful and informed. Heck, I even charge interest to my teenagers if the situation calls for it. And I pay interest to them if the situation calls for it.</p>
<p>In all honesty, I think undergraduate studies are the parent's responsibility, but graduate school is not our responsibility. If they want to go, then they have to have a way to pay for it themselves. As a family we've paid nearly $160,000 for college and you want us to pay more?! No way.</p>
<p>Now is your time to put your formal education to use: get a job, start saving or find a company to pay for it if you want to go beyond that. I never thought that was too harsh but we set that guideline early on in high school.</p>
<p>Yes ... loan the money and charge below market interest ... market interest being what the student would be charged in the open market. The interest will ensure timely payment. You can always forgive the loan/interest later.</p>
<p>My parents charged me the same interest rate they would have received if the $ they loaned me had stayed in the credit union. It was still lower than any loan.</p>
<p>I'm not passing judgement. You asked if we would charge interest. My answer is no. If I had enough money to lend it, I'd pay for it in the first place. But even if lending it, I would not charge interest. </p>
<p>I also do not feel all kids need "skin in the game." It is our desire to give our kids their education. They appreciate it and have so far gone above and beyond in their efforts to make the most of it. We can't afford college or graduate school but we are taking out loans and will pay every cent for our kids for both undergrad and grad (only one is going to grad and it is a 3 1/2 year grad program). So, though I don't have the money to pay out of pocket, I'm still paying. But for one who has the money to lend, they obviously have the money. I'd choose to pay. Even if you want the kid to pay you back, I can't understand the need for interest. Just making them pay the principal back is "skin in the game" if that is something that is important to you that the kid pays his own way.</p>
<p>I believe that it is very personal decision. I am not sure if asking for advice and listenning to it is a fair game. At the end, it is your family relationship and dynamics, background and financial situation. Every family is different in these aspects and one family decision cannot possibly be applicable to another.</p>
<p>I think this is a legitimate way to finance an education as long as it's a financial vehicle and not a way to maintain parental control. I don't know you or your family... but I know others who have operated this way, and I think you need a little quiet time in a dark room to make sure you understand your motives (and your H's) completely before making your kid sign on the dotted line.</p>
<p>If this is a good deal for your son and a good deal for your husband then great. If it's a way to "help" your son manage grad school, i.e. Anthropology no, Accounting yes... or manage the other financial issues in his life i.e. 'how can you afford a vacation to Rome when you owe us so much money" or "no way can you marry What's her name you are in debt up to your eyeballs" then this sets you all up for a very poor dynamic going forward.</p>
<p>Your son may find that a conventional education loan, while more expensive, is a far less instrusive way to manage his adulthood. Your H may find that a check for $50 on your son's birthday and the occasional meal out is a far better way to establish adult boundaries. You may find that not knowing quite so much about your son's expenses and lifestyle if he needs relief paying back the loan is a better way to be a good mom.</p>
<p>Just my experience. Who wants to be helping a 28 year old kid figure out which cable TV package they should buy, or help a 30 year old negotiate a higher salary at work so he can make good on his loan payments to dear old dad?</p>
<p>I borrowed a huge amount for grad school. I married when I chose, I bought a house when my H and I decided we could afford to, I had kids when I wanted to, and I vacationed when and where we chose. My parents freely opined whenever they thought I was being extravagant or irresponsible or just plain dumb. I didn't care- the bank took my check once a month; never told me I was having too many children too soon; didn't take issue with my lifestyle as long as that check came in every month. My parents could not have afforded to lend me the money, but even if they had-- I can't imagine being an alleged adult having to worry about what mommy thinks about my buying a couch or repairing my roof.</p>