Loan Money to Child for College?

[TromboneAl]

We'll be paying for most of our daughter's college, but we're considering loaning our daughter some of the money.  At the end of the four years, she'll owe $17,000 in government subsidized loans.   One option is for us to loan her an additional $5,000 or so.  It would be interest free, and she wouldn't start paying until she got a job.

Do you think this is a good idea or a bad idea?

I try to avoid loans to family members, but perhaps this is different.

 

[DrJDoe]

I don't have kids so I am answering this from the "daughter" half of the equation. My dad saved up a college fund by setting aside for each of us (3 daughters) a % of each paycheck. (He was also saving up for his retirement and FIRE'd at 51). He also matched any $ that we earned and put in (a certain % of earned income was mandatory). The college fund stopped accumulating the day we graduated from high school. We knew how much we had and when we used it up it was gone. I went to state school on an academic scholarship and didn't need to borrow from the government until med school (to the tune of $115K - but that's in my intro post), sister number 2 went to a slightly more expensive school and ended up with a small amount of student loan debt, sister number three also elected for state school on academic scholarship and her employer is now paying for her Masters.

OK, that was the intro... now for my point(s).
Student Loan debt is some of the CHEAPEST debt your daughter can acquire. On any subsidized part of her loans the government will pick up the interest tab during periods of deferment (in school, economic hardship, and others). Stafford Loan rates are capped. The interest is tax deductable even if you DON'T itemize. In some cases the loans can be foregiven. There will be plenty of opportunities to loan your daughter money instead of her taking on much WORSE debt. For instance, I borrowed money from Bank of Dad to pay off a high-rate variable interest student loan once my govenment loans had run out. I borrowed money from Bank of Mom so that I would have a 20% down payment on my house and not have to pay PMI. (Both my DadLoan and my MomLoan were paid off this year - early.) Sister #2 borrowed to avoid a mortgage to a bank entirely. Sister #3...nothing yet but the offer is open.

Point number 2. When the subject of loaning money to family came up I only agreed to it because the loan was NOT interest free. I had finally become financially responsible for myself and a "free" loan would have psychologically given Dad "butt-in" rights (not that he would have). We agreed on a rate that was MUTUALLY BENEFICIAL - a lower rate than I would have been able to borrow money for on my own but more than he was getting in a bank CD (started at 7% and dropped to 6% when rates when down). We agreed on a time frame and I made quarterly payments. When I bought a car from my mother-in-law a few years later and paid it off over a year she was very surprised that I insisted on paying a fair interest rate. Even though the interest only added up to about $100.

When you are getting onto your financial feet the financial ego is easily bruised and I think that too many people never learn some important lessons ("TANSTAAFL - There Ain't No Such Thing As A Free Lunch") because unconsciously they feel that Mom/Dad will always be there to bail them out. "Economic Outpatient Care" is a concept out of The Millionaire Next Door and I think it's effects can be very subtle but long-lasting.

Maybe this stuff doesn't apply to you and your daughter. Everyone's situation is different. From my perspective treating a Loan as a Loan and having the satisfaction of paying it off early as well as knowing that I had improved my parents financial situation (not that they needed it) rather than straining it (we DO worry about you guys - plus we don't want to have to pay for your nursing home bills out of our OWN pockets )gave me great satisfaction and a great ego-boost - I CAN manage my finances, I CAN manage debt responsibly, I CAN retire at 50 and beat my dad by a year!

just my 2 (very long) cents.

DrLLLong

 

[TromboneAl]

Thanks LL. Good point about charging interest on the Band of Dad loan -- I think my daughter will see it the same way that you do.

Your first point is that since gov loans are so cheap we should use those instead of BOD loans. My understanding is that she can only borrow a max of $17,125 in gov loans, so we'd be maxing out our gov loans, and the BOD loan would be on top of that.

Thanks again for your perspective on this.

 

[Mountain_Mike]

I'm "encouraging" my daughter to go to the JC for two years. That will save big time, and the units are transferrable to almost any 4-year university.

The Community College is within easy walking distance, and the room & board are "free." Plus, as an over-protective dad, I'd feel better about her leaving home with two more years of maturity.

 

[sgeeeee]

I'm "encouraging" my daughter to go to the JC for two years.  That will save big time, and the units are transferrable to almost any 4-year university.

The Community College is within easy walking distance, and the room & board are "free."  Plus, as an over-protective dad, I'd feel better about her leaving home with two more years of maturity.

Just make sure you understand what "transferrable to almost any 4-year university" really means. Credits hours almost always transfer, but that doesn't mean they transfer into requirements for a degree. Most universities are happy to give the transfer student XX hours of credit. But they may decide that the JC course on xyz is not equivalent to their own course on xyz, and require the transfer to take their own course too. I've seen JC transfers end up taking more than 3 years after transfer to get their 4 year degrees. Careful course selection at the JC along with some knowledge of the target 4 year college's requirements can help to avoid this problem.

 

[DrJDoe]

Your first point is that since gov loans are so cheap we should use those instead of BOD loans.  My understanding is that she can only borrow a max of $17,125 in gov loans, so we'd be maxing out our gov loans, and the BOD loan would be on top of that.

Sorry, my mistake...yes, you are right about that max (I borrowed after undergrad and the max jumps to $18, 500 /year.)  Perkins loans at 5% fixed ($4K/yr) are based on economic need only, Pell Grants (don't have to pay back) only if really strapped -- a penalty for those who save their money (It always made dad mad that because he SAVED his money his kids weren't eligible for some forms of financial aid where his colleagues who made the same but that SPENT their money on vacations and swimming pools got cheaper money for school).  Some kids qualify for Work Study - I worked in the med school library and pretty much got to study while manning the checkout.   Sometimes a summer job on campus or an internship for credit/$ (I worked in a Bio lab) while taking summer session classes can shave off a semester (I saved two but started with 21 credits from high school by via AP courses and a "College in High School" program through Univ of Pitt - you pay for the credits but lose the room/board).

Students can borrow more if they are Independent vs Dependent students but I believe the requirements are strict.  I was 21 in med school and financial aid office STILL wanted copies of my parents 1040s even after I was MARRIED.  You may qualify for the Hope credit ($1500/yr for first 2 years per student) or Lifetime Learning Credit ($2000/yr per return) or the Tuition and Fees Deduction (I believe up to $4000/yr). {See Publication 970 at IRS website for details http://www.irs.gov/pub/irs-pdf/p970.pdf } You could consider passing this savings on to your daughter and assigning reasonable interest (like the 5% she could get on Perkins if you didn't have so much darn money) with interest not starting until graduation.

Just some thoughts.

DrLLLong

 

[Mr._johngalt]

If you are not going to "loan" money to your kid, who are you going to give it to;  I believe in installing the ethic of self reliance, but I am averse to the drain on my wallet by Bush and the neocons who seem hellbent on taxing the hell out of the middle class to the benefit of whatever club Cheney heads. I would rather keep my kid heading in an upward trajectory so as to have a head above the white water economics the neocons seem to think we will all tolerate in exchange for some Rove generated B.S.. OOps, before I am dismissed as a working class, unionized loser, I should say that I made my bucks providing legal defense to corporate "interests." 

I read an Anne Coulter quote today that I really like. Supposedly she said "There are lots of bad Republicans, but there are no good
Democrats." A bit hyperbolic, but I like it.

JG

 

[laurence]

I read an Anne Coulter quote today that I really like. Supposedly she said "There are lots of bad Republicans, but there are no good
Democrats." A bit hyperbolic, but I like it.

JG

Anne Coulter, the "Konstitooshunal Skoler" and her breed are a big part of the problem. Her political baiting and branding everyone who disagrees with her guilty of treason (her book title, not mine) just to make an extra buck makes me sick. She also said anyone who isn't hard line orthodox democrat or republican is an idiot. So basically, if you don't drink all of your kool aid from either party, your dumb, and if it's not her party, you're evil and a traitor. Thanks, Frouline Goebbels!

 

[Mr._johngalt]

I love Anne Coulter of course, even though we all recognize she is way over the top (kind of like your faithful correspondent when
he gets going on certain topics)
Anyway, it's her schtick and it's workin'. She makes a fortune and
she's pretty cute too. A great combination!

JG

 

[MNMax]

Back to the college thing, I have 2 sons in expensive colleges, one in-state and private and the younger one, out-of-state and public. My younger son has an athletic scholarship in a non-football, or basketball sport. Of course, his scholarship money is only secure a year at a time. (I could write a whole new topic on athletic scholarships!).

Our sons did have sizeable college savings accounts, but instead of them paying the schools, we elected to have them pay us and we paid off the college expenses via PLUS loans. Our sons maximized their loans also. I consolidated our  current PLUS loans a month ago at 4.25% over 25 years, but with credits for automatic payments, the loan rate is actually about 3.9%. Our sons cannot consolidate their loans yet as they are still enrolled. However, their rates are lower than ours. The money that the boys paid us went into retirement and taxable savings accounts.

My point is - college loans are very easy to get for both students and parents, and are relatively cheap. Noone will loan you money to retire. There are other significant tax considerations.

And if you want to consolidate your loans, do it now! Rates will certainly go up on July 1st.

I feel good about how we are paying for college, but I wonder if we are getting our money's worth? I'm not sure a 40K per year school gives kids a better education than a 15K school.

 

[Mr._johngalt]

I feel good about how we are paying for college, but I wonder if we are getting our money's worth? I'm not sure a 40K per year school gives kids a better education than a 15K school.

You are most certainly NOT getting your money's worth. Neither am I!

JG

 

[Mr._johngalt]

Back to the college thing, I have 2 sons in expensive colleges, one in-state and private and the younger one, out-of-state and public. My younger son has an athletic scholarship in a non-football, or basketball sport. Of course, his scholarship money is only secure a year at a time. (I could write a whole new topic on athletic scholarships!).

Only one of my kids had any scholarships (middle daughter). She was
very smart and talented. It just occurred to me that none of my kids
were very athletic which is interesting since I was.
I couldn't have gotten a college scholrship but I could hold my own in
sandlot baseball, touch football, and even basketball in spite of being
short and white.

None of them inherited my temper and egomaniacal tendencies either.
And, none of them look much like me. I don't like where this is
taking us

JG

 

[Ol_Rancher]

JG,
I have a crush on Ann Coulter too. I simply can't get enough of those conservative long long legs and rith wing long long blonde hair .. I even listen to what she had to say most all of which makes sense to me.

Maybe if Hilliary didn't have tree stumps for legs her message would go over a bit better

 

[cute fuzzy bunny]

I wonder what the delta is between long term earnings of your kid going to college, perhaps learning something they can use to get a better paying job versus giving the kid the money and investing it in a 20 year plan versus investing the money in a relatively safe small business.

At age 40, I wonder which strategy on average produces in satisfaction and $$.

I'm imagining the $60-200k+ put in a 20 year investment plan at 18 produces an ER at age 40-45, after the kid's pretty much set his or her life.

 

[laurence]

JG,
I have a crush on Ann Coulter too. I simply can't get enough of those conservative long long legs and rith wing long long blonde hair .. I even listen to what she had to say most all of which makes sense to me.

Maybe if Hilliary didn't have tree stumps for legs her message would go over a bit better

Hey, I never said she wasn't hot! My problem is strictly with the words coming out of her mouth.

 

[cute fuzzy bunny]

I was going to say something like "several extremely naughty ideas come to mind" but decided not to.

Hey, Bill Maher's fooled around with her and there cant be two more polar opposite people politically...gotta be something good going on there.

 

[TromboneAl]

Yes, TH, I've thought the same thing.  If I put the $160,000 in an account for my daughter, it would have a good chance of completely funding her early retirement.

But of course it's more than a financial decision.  She's probably going to enjoy life more as a biomedical engineer than as a waitress with a really big retirement account.  

 

[laurence]

ah, but as a biomedical engineer with some big student loans who didn't have to save for retirement.....

.....my wife is in Biotech, got B.S. in Biology with a minor in Chemistry, got her M.S. in regulatory affairs, doing very well in her career, working for a great company that is a darling of the market, and she only racked up about 40k in student loans getting there. I think there are a lot of top notch public schools that will get you into the upper echelon of your career path without breaking the bank. I think Private schools are overrated. If there is a specific reason to go to a school, then hey, that's all out the window, but just to go private for the label.

 

[TromboneAl]

Yes, you may be right Laurence. But I told Jenny that the choice of college was totally up to her. Even with the high cost, the choice will affect her much more than it affects me, so I'm glad that I did little to influence her decision.

Washington Univ has a great biomedical department, and I'm really impressed with the school in general. It doesn't have the name recognition of other colleges, although perhaps it is well known in the biomed community(?). She also got into Cornell, which is where I went, and which is more well-known, but chose Wash U because the program seems better.

I wouldn't sell name recognition short. I think the name Cornell had an important role in getting me my first job in computers. Who knows where I'd be if I hadn't gotten that job.

 

[laurence]

It definitely plays a part, and my comment was definitely not specifically aimed at you. Dad went to Cornell, but he transferred after a year. We in California are spoiled with our UC system. My wife went to UCSD which is something like number 7 in the nation for her major, and the surrounding Biotech community is so strong that she was put on a quick path to career success, even before she graduated. Everyone's circumstance is different, though. It sounds like you've got a great daughter, I have heard a lot of good things about Whashington U, my brother was choosing between that school and Columbia (chose the latter), I think you are making a great investment, after all, she's going to pick your nursing home!

 

[hydroguy]

I love Anne Coulter of course, even though we all recognize she is way over the top (kind of like your faithful correspondent when
he gets going on certain topics)
Anyway, it's her schtick and it's workin'. She makes a fortune and
she's pretty cute too. A great combination!

JG

I love Ann Coulter too and although I am very conservative I think she definitely goes way over the top some of the time. She certainly isn't hard to look at though, maybe that's why I cut her some slack......I'm so easily swayed by a beautiful face.

I find that Thomas Sowell's editorials and books are more in line with my poliltical, economic, and social philosophies.