As others have said, I can only imagine that the reason the parents want to do it this way is because they feel confident they can beat the 3% rate. Let’s say this is true and they can earn twice that much at 6%. It still hardly seems worth all the hassle and uncertainty associated with such actions, unless they sign a contract with you that they will pay off the loans immediately upon the start of your last semester when your final payment is due to Cal Tech so you have no debt on your record at graduation. I would also include a clause that if interest rates rise above 4.5%, they agree to pay off all outstanding loans and pay for the rest of your education in a timely (ordinary) manner. I know this may sound weird, but they are asking you to take a very substantial risk if something were to happen to their income earning ability. It is only fair that you also take a very business like approach to protect yourself. They should understand that. In fact, it would probably be a good idea to make sure there is some kind of insurance policy in case they can no longer earn sufficient money to keep up their end of the bargain. Again, you must mitigate risk.
Given how complicated that all is, I suggest they ignore the few thousand dollars they think they will make on the difference between the loan interest rate and their ability to invest the money and just pay the tuition in the ordinary fashion.
It’s not “real” debt @SouthFloridaMom9. They have the money, they just want to invest it elsewhere while enjoying low interest loans. He is confident he will not be paying off debt after graduation. Still, there are risks as I point out above.
When debt collectors get on your tail they don’t care about your confidence levels when you took on the obligation.
What happens when you want to change majors, stay at home with a baby, marry somebody your parents don’t like?
These parents could be the most wonderful people on the planet - this is nothing against them per se. I just would not like that type of relationship with my son. If I wanted him to have “skin in the game” I’d have him take on the very limited levels of student loans that students can take, and that’s it. Otherwise I would expect us - as people in our mid lives with the higher income and life experience - to take on the risk of whether a particular bachelor’s degree is worth $240K. I wouldn’t put the weight of that decision on an 18 year old. But that’s just me.
It could all work out fine (and I truly hope it does). But if it doesn’t, the consequences for this young person could be life altering.
Thanks so much for all the advice! I’ll try to reply to everything as I’m still confused on what to do.
First off, about the employer loan repayment… Honestly, I’ve never heard of it either, but it’s “anecdotal evidence” coming from a family friend. I will ask if that was only the $27,000 of federal loans as my parents may be confused. @jym626@CourtneyThurston
My parents and I had many discussions about where I should attend and the decision was unanimous. The money was never an issue. They aren’t looking for a way to back out of paying my tuition; they just don’t see the harm in taking out loans and deferring payment (I don’t know if they know about the gift tax issue). @carolinamom2boys@thumper1
Me going to this school was never contingent on taking out ANY loans, although I am not opposed to taking out a more manageable amount. They aren’t vindictive parents and I’ve always had a good relationship so I don’t think @mom2collegekids advice applies? @jym626
However, after reading this thread, I don’t want to start my adult life with this debt hanging over my shoulders.
I will ask about them taking out a home equity loan or something similar, but I think the idea of deferring payment appeals to them. @jeepgirl I don’t even think they have a plan for investing the money? @fallenchemist
@suzyQ7 I will probably take your advice and ask them to pay at least half now. They have the money saved up for this purpose and I hope they’ll understand my hesitance.
@yearstogo is the only one in this thread who is thinking along the same line as my parents. I think they view it as a sort of credit card bill and expect to pay back a big chunk of it every year while I’m in college. Does that change things at all? My parents are assuming that (variable) interest rates will not go up past 6%ish in the couple of years while they repay the loans. They PLAN to repay the full amount in a few years maximum, not the full 10 years (obviously plans can change).
@mom2collegekids Haha nope definitely CS for me (I’ve been doing it a while and really enjoy it). I think you’re referring to me possible minoring/double majoring in a humanity which is pretty easy to do at Caltech. Not sure where you are getting the sports management?
"“First off, about the employer loan repayment… Honestly, I’ve never heard of it either, but it’s “anecdotal evidence” coming from a family friend. I will ask if that was only the $27,000 of federal loans as my parents may be confused. @jym626@CourtneyThurston”
Well your family friend is misinformed or lying to you. I literally work for one of those companies. We do not pay off loans of any amount.
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Also Parent Plus loans offer protection, if parent dies they are forgiven, right?
That might not apply to the Wells Fargo and similar private loans.
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Very true. But ONLY for the parent who SIGNED…if the spouse (breadwinner) didn’t sign, then it’s not forgiven though. Always have the main breadwinner sign.
This whole idea of big loans with the idea that the family is going to invest the college money instead is crazy.
When I went to business school everyone (and I mean everyone) took federally insured loans which required payback at 3%, and parked the dough in a money market account earning 10-11%. OP- if your parents are my age and remember the era of cheap and easy money, perhaps this is part of their thinking.
Everything has changed in the loan business since then. At the time, it was easy to discharge those loans in bankruptcy (although nobody was planning a bankruptcy). It was easy to buy a house with no money down as long as you took out PMI so nobody worried about being able to get a mortgage with college loans hanging over their head. The underwriting standards for virtually every form of credit were much different than they are today so you didn’t have to consider your school loans as part of your overall financial picture- you could still borrow what you needed for cars, starting a business, etc.
I’m thinking your parents financed their own education this way. But the loan picture has changed dramatically since then, not the least of which is the idea that if they want to get a 10-11% return they are taking on risks with the capital, not just parking it at Merrill Lynch in a money market account like in the late 1970’s/early 1980’s.
The company I work for will sometimes pay off loans. Sometimes. You need to be employed here when you start your academic program. The degree needs to be signed off on as materially relevant to your ultimate career goals. You need to meet certain GPA requirements every semester. AND (the big one) if you leave before a certain period of time, you pay us back the loan.
OP- I’m pretty certain that any company that offers the loan repayment benefit requires you to sign a document with a repayment schedule BACK to them if you leave. You could be looking at 10 years with a single company (even if you hate your job) as the loan is gradually forgiven.
If you agree to this and especially if one parent is the high earner, I would ask that they purchase life insurance with you as the beneficiary up to the amount of the debt (this would be in addition to anything they already have set aside for you). I do not know whether if that parent was disabled that the insurance would kick in …it may depend if it is whole or term…that’s not my area but should be investigated.
You need to very carefully look at what happens in terms of repayment of a private loan if it is a cosigned loan…and the qualified singer (that would be your parent) dies.
Also, what happens to your schooling costs if something happens to your parents while you are still a student? Who will pay?
The parents say the will be paying off the interest on these private loans as it accrues. This will eat into their “investment profit”. I’m sorry, but it’s unlikely to me that they are going to net much from this scheme.
Keep in mind also, college costs increase annually…so factor that into your loan equation also.
I think you need to have a very serious discussion about this with your parents. If they have always said they will pay your college costs, then now is the time for them to agree to do so.
If they don’t…and insist YOU take out these loans…JUST SAY NO. Tell them YOU don’t want to have anything to do with that kind of debt…and you are prepared to make alternate plans for your college attendance.
Did this loan scheme come up after you committed to Caltech?
Income earned on the invested money is taxable while the interest expense is largely nondectible. That, along with the cost of filing gift tax returns, should be considered in the overall return on investment scheme.
Life insurance (life insurance pays on the death of the insured, disability pays if there is a qualified disability, if the parent buys both, the premiums will be pretty high) is a good idea, but the cost of that will eat into the ‘profits’ to be made by investing the loan.
The original question was what are the pros (the parents might make some money investing the loan) and cons (high unsecured debt by a 22 year old at graduation that may impair buying a home, getting a job, or cause other personal problems).
I think it is a high cost your parents are asking you to pay.
@thumper1 This came up a few days ago. So calmly asking my father to talk more about taking out these loans because I feel uncomfortable didn’t go so well. Lots of yelling (all one sided too… I didn’t even voice concerns yet, just that I wasn’t ready to sign today). From what I understand they want to keep their ‘cash flow open’ for emergencies and house renovations. I don’t know what to do.
The fact is…you cannot get these huge loans without your parents as cosigners HUGE LOANS.
You can go to a less expensive college…and get a CS degree. You don’t have to go to Caltech at well over $60,000 a year.
You cannot be forced to cosign loans. You have to agree to do this. That is a FACT. Your father is trying to force you to cosign a loan.
He has the income and collaterol to get a loan. You don’t. That is a fact.
If he is so ready to pay for your college costs…now is the time to do so…not later. That is my opinion. But the FACT is…he cannot force you to sign that loan.
You can take a $5500 Direct loan in your name only.,that is a fact too.
Your parents’ cash flow will be exactly the same whether they take a private loan with you as a cosigner…or whether they take a Plus loan…or home equity loan…both in their names only. That is a fact.
The only ‘fact’ I need is that I am a legal adult (are you?) and I am not going to take even a remote chance of being on the hook for $240K for an undergraduate degree. If that means I don’t go to Caltech, so be it. But that’s me, and only you can figure out your own boundaries.
The difficulty is to do this in a graceful way without coming off like a know-it-all or spoiled kid. You sound respectful of your parents so that doesn’t seem like a problem for you.
It’s scary to go against your parents in this way, and they most likely mean well. I do understand that.
That being said, I rarely see so much agreement on CC. There are many types of parents/students here and many different thoughts on the university selection process. Yet many have raised potential concerns.
“If our family can’t afford to pay for me to go to Caltech, I would be very willing to look at more affordable options after taking a gap year. I am not willing to cosign $60,000 a year in loans.”
Like I said…they cannot force you to cosign. If you feel this is what is being done…you need to seek some legal counsel.
Also if you get to the point of going to a bank to sign for a loan, you can tell the loan officer…I do not want to cosign for this loan.