What if you agree to full pay for Ivy Law school because you have income and money but due to some unforeseen issue your income situation changes and in the end you don’t have as much for retirement as you estimated, should you take kid’s word that they’ll help or get loan documented?
In my family we don’t lend money to family members. We either gift/fund, or apologize that we’re unable to fulfill the request.
I don’t know enough about your situation to help. Did you commit to three years, tuition plus living expenses in NYC for Columbia Law school, and as a result, kid turned down a merit award at Northwestern or Duke? And is there a reason why kid doesn’t borrow from another source instead of from you? And is this hypothetical or real?
Nobody will lend you money for retirement. Whether it’s advisable to borrow a huge amount for law school is a discussion worth having- but at a minimum, there are sources for the money that are not your 401K. Just a suggestion.
This is a what if senecio of a parent funding law school on assumption of enough years of high income remaining to save again and life throws a curve ball.
If you’re playing what-if, then what if the kid devotes the career to lower paying service work or marries and moves to a lower salary area or gets sick /hates it, and drops out?
Or spends that high income on his own prefs? If retirement concerns you, dont give out retirement funds. Do it out if your disposable income or assets.
Putting it in writing makes misunderstandings less likely, but are you really going to sue your own child? That’s how you enforce contracts, by suing.
@twoinanddone No. You added clarity, if parent doesn’t want to legally enforce it, there is no real point in getting it documented.
We don’t lend to family. That rarely ends well. Either give with no repayment conditions or let them know you would love to help but aren’t in a position to do so at the moment.
I think there is a point to ‘writing it down’ because then both sides know what the terms are ($100/mo? lump sum repayment at 5 years, the money comes out of the will for this student) but you know you aren’t going to legally enforce it.
Pro to doing a formal loan - you are a creditor. Benefit 1: if your kid has a financial issue down the road, you get your cut as a creditor. After your kid is out of his/her financial difficulty you can choose to make a gift to your kid out of that money you took as a creditor. If possible, provide in loan that it will be secured by assets as soon as accumulated and then follow through on that. Benefit 2: if your finances go downhill and you need to be supported in your retirement, I think having this as a student loan that must be paid back can cause less issues/resentment than kid having to support parents who didn’t save enough to take care of themselves. Resentment might not be from your kid but from your kid’s future spouse. ( and in the event of their divorce this is a legal obligation that might be taken into account rather than something nice to do).
Con to doing a formal loan - potential income tax consequences.
@Riversider Of course we would and yes we would take their word for it. We can trust our kids to do the best they can for us and us for them in this kind of situation. And yes, life can throw curve balls, but in our family, we would help each other work out the curveballs. It’s not like they are gonna say, “Too bad, see you later!” Can’t imagine having that kind of family dynamic.
Blueskies- I agree with you and that’s the dynamic in my own family. But as Melvin points out-- future spouses could be a factor and I’ve seen plenty of “Oh, it wasn’t a loan, it was a gift” situations once there’s an inlaw child in the mix.
Whether it’s a loan for a downpayment, grad school, to start a business or whatnot- the parents think it’s a loan, the kid thinks it’s a loan, the spouse convinces the kid the parents would never take money “from their own flesh and blood” and before you know it, nobody is speaking to anyone else.
But I wouldn’t lend my kids money. If I can afford it- I give it. And if I can’t- I decline and explain that my love is eternal, but my financial support can’t extend to XYZ.
@blueskies2day - You’d be surprised. Even in “good” families a kid can throw you for a loop. My grandparents sold the family farm to their youngest son on an honor system in the early 70’s for 300K and retired. This was a crap ton of money back then and they should have been able to retire comfortably off their savings, SS, and the farm payments.
Well, their son turned out to not be a very savvy businessman. First he quit making payments, then later he ended up selling off animals and equipment and eventually the entire farm for a fraction of what he paid for it. Just enough to build a modular house in town. My grandparents got nothing. My grandma was heartbroken about the entire thing and they had to scrape by on SS the rest of their lives.
I lent a good chunk of money to my kid & spouse. With a promissory note. Not that I would ever enforce it, but I want them to take it seriously after getting themselves into financial trouble. Would that they had come to me earlier. And my interest rate [the lowest possible of the federal rates that escape gift tax review] is about a tenth [or less] of what a commercial debt-consolidation service would have charged for consolidating their debts. Kiddo will inherit what’s left in any event, and I could afford to lose the loan amount, but I thought a loan better than a gift in the circumstances. Everyone’s situation is different.
We would not lend our kids money for grad school. You do know…the law school student can take a grad plus loan up to the cost of attendance to attend law school. There isn’t any reason why the parents need to give a loan…unless they want to.
In our family, we understand that any loan we extend to a family member is really a gift. If it’s repaid, fine.
@Riversider if it were me, I would have my kid take the grad plus loan…then IF you have the resources, help them repay that loan. You could also pay the interest off annually as a gift.
My parents have loaned me money, but not for education. We did loan documents. I’d document it. What if something happens to said kid, and parents want payback from the estate, for example? It doesn’t hurt to document, and could help.
I don’t think it’s realistic to predict what a 20 something’s career path is going to be. There are just too many unknowns and roadblocks in life.
IMO, if you are worried for your retirement, I would not loan the money period. Co-sign a loan, maybe.
FIL helped us with our first home many yrs ago. Didn’t want to cosign (as a much older person now, I completely understand and agree with that), so he loaned me the down payment. Literally printed off an amortization schedule, charged me the same interest the bank was charging, etc. I paid it every month and we paid it off on time. All that said, it was a very weird feeling for me as my family would have never charged interest, set up a formal payment plan and amortization schedule, etc. They would have said pay me back when you can.
Looking back I appreciate his approach. made it very business like, simply replacing the bank with himself.
Every family is different. My guess is he would not have done it any other way.
Well, actually there is - simply for purposes of clarity because memories differ over time. It doesn’t really make sense to pay for law school with the generalized assumption/expectation that the student will support you in your old age if needed ---- but if you do want or hope that your child will pay you back in some manner for your funding for college or law school – some sort of documentation or memo will help to potentially avoid feelings of resentment down the line.
I know that I have put things in writing between my kids and I for various financial matters. Not necessarily a formal, signed contract – but a note or a memo, such as an understanding as to how the money is to be used or specific terms about repayment.
There are two levels where conflict arises: one is where there is a legitimate misunderstanding; the other is where there is an intent to break an agreement. If you aren’t going to sue your kid, then a written contract won’t help in the situation of the intentional breach. But where all parties are acting in good faith, then a written memo will definitely help to set things straight in the event things go astray down the line.
Voting no to loan to family members. We fund that it actually does change the taste of Thanksgiving dinner. Especially no if your don’t have enough for retirement. My children are taking out the standard federal students loans for undergrad. My unspoken intention is to help them pay it off. If it turns out that DS and I are not able to because retirement needs, I won’t.
As stated, do don’t want to have to live with the lawyer and future family because squandered your own retirement funds.
I can see where it gets ugly (I like that visual of changing the taste of Thanksgiving). Last thing you want is to lend someone funds and watch them live a life beyond their means. My thinking on that is you can do whatever you want with your money but not so much with mine.
Although it felt odd to pay back FIL on a bank payment schedule with interest (everything less the payment stubs), at least it eliminated any of those hard feelings.