How to help my son with law school loans?

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Topic Author
Sinbad
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How to help my son with law school loans?

Post by Sinbad »

I paid for my son's undergraduate education, but he was responsible for most of his law school tuition and living expenses. He got an excellent big firm job after law school and all was fine until the financial crisis, which devastated his law firm's corporate finance practice and led to his being laid off. Since then, he has worked as a lawyer, but has not earned as much as he did before. Meanwhile, he has about $100k in loans that are sapping his ability to move forward in his life. He has a great girlfriend and I think if their finances were more solid they would get married and start a family, which we would love. He lives frugally, is very smart, talented, hard-working, and a very good young man.

Assume that I would like to help ease his burden regarding the loans. How should I do this?

We are nearing retirement (both age 64), but my wife and I have considerable resources: social security and a joint life pension that will yield $110k a year; $1.8 million in a 403b and $700k in a taxable account; $1 million of equity in our home ($500k mortgage at 3.5%, with an assessed value of $1.5 million). We are both in good health. My wife is retiring this year. I have a job that is very secure and that I can adjust as I like to reduce or maintain work and income. But I would like to bail at 67, or at least work very little thereafter.

What is the best way to help my son? I have the following two ideas:

1. Give him $50k from the taxable account (over a couple of years so that it meets the gift tax requirement). Though, I think I am a co-signer on some of the loans, so perhaps I could pay those as my own obligation and the gift tax issue would not arise.)

2. Take out either a fixed rate home equity loan or a variable rate line of credit and use the money to reduce his loan balances in a way that significantly lightens his monthly payments. At current rates, a 15 year line of credit would get a rate of 4.5%. A 30 year fixed rate would get a rate of about 8%. The interest on these loans would be tax-deductible to me.

What would people here recommend as the best way to help him while minimizing the impairment of our retirement resources?

Thanks for your thoughts.

Sinbad
manwithnoname
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Re: How to help my son with law school loans?

Post by manwithnoname »

Sinbad wrote:I paid for my son's undergraduate education, but he was responsible for most of his law school tuition and living expenses. He got an excellent big firm job after law school and all was fine until the financial crisis, which devastated his law firm's corporate finance practice and led to his being laid off. Since then, he has worked as a lawyer, but has not earned as much as he did before. Meanwhile, he has about $100k in loans that are sapping his ability to move forward in his life. He has a great girlfriend and I think if their finances were more solid they would get married and start a family, which we would love. He lives frugally, is very smart, talented, hard-working, and a very good young man.

Assume that I would like to help ease his burden regarding the loans. How should I do this?

We are nearing retirement (both age 64), but my wife and I have considerable resources: social security and a joint life pension that will yield $110k a year; $1.8 million in a 403b and $700k in a taxable account; $1 million of equity in our home ($500k mortgage at 3.5%, with an assessed value of $1.5 million). We are both in good health. My wife is retiring this year. I have a job that is very secure and that I can adjust as I like to reduce or maintain work and income. But I would like to bail at 67, or at least work very little thereafter.

What is the best way to help my son? I have the following two ideas:

1. Give him $50k from the taxable account (over a couple of years so that it meets the gift tax requirement). Though, I think I am a co-signer on some of the loans, so perhaps I could pay those as my own obligation and the gift tax issue would not arise.)

2. Take out either a fixed rate home equity loan or a variable rate line of credit and use the money to reduce his loan balances in a way that significantly lightens his monthly payments. At current rates, a 15 year line of credit would get a rate of 4.5%. A 30 year fixed rate would get a rate of about 8%. The interest on these loans would be tax-deductible to me.

What would people here recommend as the best way to help him while minimizing the impairment of our retirement resources?

Thanks for your thoughts.

Sinbad
I would figure out the cheapest way to give him the money so that he gets the tax deduction for loan interest deduction. Variable rate loan can be dangerous if its for a long term b/c interest rates will rise. If you are retired I don't know why you want to take out a 15 year loan.
ChrisC
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Re: How to help my son with law school loans?

Post by ChrisC »

Sinbad wrote:I paid for my son's undergraduate education, but he was responsible for most of his law school tuition and living expenses. He got an excellent big firm job after law school and all was fine until the financial crisis, which devastated his law firm's corporate finance practice and led to his being laid off. Since then, he has worked as a lawyer, but has not earned as much as he did before. Meanwhile, he has about $100k in loans that are sapping his ability to move forward in his life. He has a great girlfriend and I think if their finances were more solid they would get married and start a family, which we would love. He lives frugally, is very smart, talented, hard-working, and a very good young man.

Assume that I would like to help ease his burden regarding the loans. How should I do this?

We are nearing retirement (both age 64), but my wife and I have considerable resources: social security and a joint life pension that will yield $110k a year; $1.8 million in a 403b and $700k in a taxable account; $1 million of equity in our home ($500k mortgage at 3.5%, with an assessed value of $1.5 million). We are both in good health. My wife is retiring this year. I have a job that is very secure and that I can adjust as I like to reduce or maintain work and income. But I would like to bail at 67, or at least work very little thereafter.

What is the best way to help my son? I have the following two ideas:

1. Give him $50k from the taxable account (over a couple of years so that it meets the gift tax requirement). Though, I think I am a co-signer on some of the loans, so perhaps I could pay those as my own obligation and the gift tax issue would not arise.)

2. Take out either a fixed rate home equity loan or a variable rate line of credit and use the money to reduce his loan balances in a way that significantly lightens his monthly payments. At current rates, a 15 year line of credit would get a rate of 4.5%. A 30 year fixed rate would get a rate of about 8%. The interest on these loans would be tax-deductible to me.

What would people here recommend as the best way to help him while minimizing the impairment of our retirement resources?

Thanks for your thoughts.

Sinbad
Something I'm thinking about as well. We also paid for all of our children's undergraduate educations. Youngest daughter has over $138K in loans from law school, at 6.5 percent interest. We're trying to convince her to let us "refinance" these loans by having us pay off the loans and have her take out a loan from us at 2-3 percent interest over a long repayment period. This would greatly reduce her debt service payments. She graduated last year and is fortunate to have a well paid job. Right now she's mired in work, has an aggressive loan repayment schedule, and does not want our help. We're having difficulty talking financial sense to her about our proposal. (We did advance her some money before she started work and she is paying that money back to us -- no interest on the advance.)

If I were you, I'd pay off the loans, especially if they bear a high interest rate and you're an obligor/co-signer. You can either treat this as a "gift" between you and your son or a "refinancing" if he pays you back perhaps under generous repayment terms (lower interest rate and longer maturity). If you refinanced his loan and he paid you back, you'd have to declare the interest repayments as income to you, but that income could be a better return than current CD rates. Don't know if your son is currently deducting the interest on his student loans on his tax returns -- I think there's a phase out of deductibility of student loan interest at certain borrower income levels -- this could be a consideration.

I don't see how gifting or lending to retire your son's debt could impair your retirement resources. Seems like you have plenty of excess resources to help son out without impairing your retirement lifestyle from what you posted here and in another thread. Your children are going to wind up with a sizeable legacy anyway; perhaps it might be better to give from a warm hand rather than a cold one.
jackpullo997
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Re: How to help my son with law school loans?

Post by jackpullo997 »

Just pay it off. He is already frugal and hard working, so you're not risking spoiling him.
Your money will be taxed at 50% when you die. Pass it along while you can without the 50% haircut.
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carorun
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Re: How to help my son with law school loans?

Post by carorun »

I assume his income is over the student loan deduction threshold (75k AGI for singles). If your name is on some of the loans, just pay those off out of your taxable account or free cash flow, and gift the rest over a few years. You're in a great spot, and may hit the estate/lifetime gift ceiling (depending on how laws go in the next several years- states seem to be lowering these ceilings, not raising them). If you and your wife both gift the max, these loans should be gone in 4 years.
Grt2bOutdoors
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Re: How to help my son with law school loans?

Post by Grt2bOutdoors »

Take a $100K from your taxable account and pay it off. Why get creative here? You have the money, therefore why is another form of a loan necessary?
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Grt2bOutdoors
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Re: How to help my son with law school loans?

Post by Grt2bOutdoors »

ChrisC wrote:
Something I'm thinking about as well. We also paid for all of our children's undergraduate educations. Youngest daughter has over $138K in loans from law school, at 6.5 percent interest. We're trying to convince her to let us "refinance" these loans by having us pay off the loans and have her take out a loan from us at 2-3 percent interest over a long repayment period. This would greatly reduce her debt service payments. She graduated last year and is fortunate to have a well paid job. Right now she's mired in work, has an aggressive loan repayment schedule, and does not want our help. We're having difficulty talking financial sense to her about our proposal. (We did advance her some money before she started work and she is paying that money back to us -- no interest on the advance.)
Think about this - stop accepting anymore repayments from her in regards to your advance before she started work. Instead, tell her to take those payments and use it to reduce the balance of her law school loans. Now you will have accomplished two things; one you will reduce her interest expense burden and two - you will reduce her overall level of debt service. Mission accomplished.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions
desiderium
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Re: How to help my son with law school loans?

Post by desiderium »

Pay it off in the simplest and most efficient manner
You will be fine financially, and your gift is consistent with your demonstrated commitment to family ties. He will approach things the same way when you are infirm and need his assistance.
Bob's not my name
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Re: How to help my son with law school loans?

Post by Bob's not my name »

vachica wrote:I assume his income is over the student loan deduction threshold (75k AGI for singles).
Probably true but also irrelevant. The maximum deduction is $2,500, so the top $60,000 of his debt is not deductible regardless of his income.
mnvalue
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Re: How to help my son with law school loans?

Post by mnvalue »

It seems that paying off the loans where you're a co-signer is not a gift: http://helpdesk.blogs.money.cnn.com/201 ... n-gifting/ Also, keeping this simple and just using your taxable funds seems to make sense. (Unless you need that money for Roth conversions. Have you developed a strategy one way or another there first?) In the event your son has a lower long-term capital gains rate, you should gift him appreciated shares of stock that he sells. However, it's my guess that his LTCG rate is probably the same as yours, so then you can just sell and give him cash.
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Sinbad
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Re: How to help my son with law school loans?

Post by Sinbad »

mnvalue wrote:It seems that paying off the loans where you're a co-signer is not a gift: http://helpdesk.blogs.money.cnn.com/201 ... n-gifting/ Also, keeping this simple and just using your taxable funds seems to make sense. (Unless you need that money for Roth conversions. Have you developed a strategy one way or another there first?) In the event your son has a lower long-term capital gains rate, you should gift him appreciated shares of stock that he sells. However, it's my guess that his LTCG rate is probably the same as yours, so then you can just sell and give him cash.

Thank you ALL very much for your thoughts suggestions. The info on payments to co-signed loans not counting as a gift is very helpful. Thank you.

But I am still wondering if it make sense to take an equity loan to pay off his loans. If I simply withdraw the money from my taxable account, I will pay cap gains and lose the investment appreciation. If I take an equity loan, I will pay interest (at a much lower rate than the cap gains), and the interest will be deductible. AND, I will still have the money in the taxable account invested and appreciating (hopefully).

So, while it is simpler to just pull the money out, pay the taxes, and pay the loans, I do wonder if the financing makes more sense via an equity loan. Heck, even if I then made the equity payments from the taxable account rather than from current accounts, I would be getting a deduction to offset the cap gains I would be paying.
Last edited by Sinbad on Sat Mar 22, 2014 1:49 pm, edited 1 time in total.
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goodenyou
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Re: How to help my son with law school loans?

Post by goodenyou »

It sounds like your child is a responsible hard-working person. If you have the means, why not. He can enjoy the relief of debt while he is young. My only concern would be if you had multiple children; this often can be dicey if you do it for one and not others.
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Sinbad
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Re: How to help my son with law school loans?

Post by Sinbad »

goodenyou wrote:It sounds like your child is a responsible hard-working person. If you have the means, why not. He can enjoy the relief of debt while he is young. My only concern would be if you had multiple children; this often can be dicey if you do it for one and not others.
Yes, I have one other child who is in graduate school and has no income at the moment. I have to be able to help him to the same extent. Right now I am paying about $450 a month to cover his eduction loans, which he expects to take over when he is working.
adam1712
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Re: How to help my son with law school loans?

Post by adam1712 »

Sinbad wrote: Thank you ALL very much for your thoughts suggestions. The info on payments to co-signed loans not counting as a gift is very helpful. Thank you.

But I am still wondering if it make sense to take an equity loan to pay off his loans. If I simply withdraw the money from my taxable account, I will pay cap gains and lose the investment appreciation. If I take an equity loan, I will pay interest (at a much lower rate than the cap gains), and the interest will be deductible. AND, I will still have the money in the taxable account invested and appreciating (hopefully).

So, while it is simpler to just pull the money out, pay the taxes, and pay the loans, I do wonder if the financing makes more sense via an equity loan. Heck, even if I then made the equity payments from the taxable account rather than from current accounts, I would be getting a deduction to offset the cap gains I would be paying.
Do you have to sell? What about using the dividends from your taxable account? Also, have you currently been investing in taxable and could instead stop new contributions and gift those to him?
Bob's not my name
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Re: How to help my son with law school loans?

Post by Bob's not my name »

Gift the stock to your son if he will pay capital gains tax at a lower rate.
denovo
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Re: How to help my son with law school loans?

Post by denovo »

jackpullo997 wrote:Just pay it off. He is already frugal and hard working, so you're not risking spoiling him.
Your money will be taxed at 50% when you die. Pass it along while you can without the 50% haircut.
[OT comment removed by admin LadyGeek] The top tax rate for estates is 40 percent and there is a 5 million dollar exclusion. Their assets are less than 5 million. More importantly, their exclusions can be combined, up to 10 million dollars. This is information that can be easily found so you should be more careful when people are seeking financial advice.
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Re: How to help my son with law school loans?

Post by HueyLD »

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Last edited by HueyLD on Sat Feb 07, 2015 4:29 pm, edited 1 time in total.
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Sinbad
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Re: How to help my son with law school loans?

Post by Sinbad »

But I am still wondering if it make sense to take an equity loan to pay off his loans rather than to withdraw the money from the taxable account.

If I simply withdraw the money from my taxable account, I will pay cap gains and lose the investment appreciation. If I take an equity loan, I will pay interest (at a much lower rate than the cap gains), and the interest will be deductible. AND, I will still have the money in the taxable account invested and appreciating (I hope).

So, while it is simpler to just pull the money out, pay the taxes, and pay the loans, I do wonder if the financing makes more sense via an equity loan. Heck, even if I then made the equity payments from the taxable account rather than from current accounts, I would be getting a deduction to offset the cap gains I would be paying.
Bob's not my name
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Re: How to help my son with law school loans?

Post by Bob's not my name »

You've never stated how much would be realized in capital gains if you liquidated the least appreciated assets in your taxable account, so we can't answer. Nor have you said what your LTCG tax rate will be this year with your wife working only part of the year and next year when she's not working at all.

If you're helping one kid you ought to be helping the other equally, so you should be gifting appreciated stock to the student, too. He'll pay 0% capital gains tax (federal). 0% is a very low tax rate (but make sure he doesn't put himself above the Lifetime Learning Credit phaseout, and make sure he doesn't pay his final tuition bill before Jan 1).
Last edited by Bob's not my name on Sun Mar 23, 2014 10:33 am, edited 1 time in total.
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Meaty
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Re: How to help my son with law school loans?

Post by Meaty »

jackpullo997 wrote:Just pay it off. He is already frugal and hard working, so you're not risking spoiling him.
Your money will be taxed at 50% when you die. Pass it along while you can without the 50% haircut.
+1. Pay it from your taxable account
"Discipline equals Freedom" - Jocko Willink
ChrisC
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Re: How to help my son with law school loans?

Post by ChrisC »

Grt2bOutdoors wrote:
ChrisC wrote:
Something I'm thinking about as well. We also paid for all of our children's undergraduate educations. Youngest daughter has over $138K in loans from law school, at 6.5 percent interest. We're trying to convince her to let us "refinance" these loans by having us pay off the loans and have her take out a loan from us at 2-3 percent interest over a long repayment period. This would greatly reduce her debt service payments. She graduated last year and is fortunate to have a well paid job. Right now she's mired in work, has an aggressive loan repayment schedule, and does not want our help. We're having difficulty talking financial sense to her about our proposal. (We did advance her some money before she started work and she is paying that money back to us -- no interest on the advance.)
Think about this - stop accepting anymore repayments from her in regards to your advance before she started work. Instead, tell her to take those payments and use it to reduce the balance of her law school loans. Now you will have accomplished two things; one you will reduce her interest expense burden and two - you will reduce her overall level of debt service. Mission accomplished.
I would do that but my daughter is stubborn. She wants to be financially independent from her parents and insists she pay us back. Some of this is due to the way she's wired; some of this is due to her self-appointed role as the "equalizer" among her siblings -- she makes sure that siblings are treated "equally" in the family. In short, this type of parental financing would alter financial equality among siblings.

Getting back to the OP, I'm finding it a bit mind-numbing to figure out whether financially he's better off taking out a home equity loan versus just closing some of his positions in his taxable account to retire his son's debt. How much of a difference is that? And it's not like you're throwing money down the toilet if you miss optimal financial outcomes.
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Re: How to help my son with law school loans?

Post by placeholder »

denovo wrote:[OT comment removed by admin LadyGeek] The top tax rate for estates is 40 percent and there is a 5 million dollar exclusion.
And capital assets get a step up in basis when inherited.
Bob's not my name
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Re: How to help my son with law school loans?

Post by Bob's not my name »

ChrisC wrote:I'm finding it a bit mind-numbing to figure out whether financially he's better off taking out a home equity loan versus just closing some of his positions in his taxable account to retire his son's debt.
It's not mind-numbing at all. It's impossible. We have none of the information needed to do the math.
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Sinbad
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Re: How to help my son with law school loans?

Post by Sinbad »

Bob's not my name wrote:
ChrisC wrote:I'm finding it a bit mind-numbing to figure out whether financially he's better off taking out a home equity loan versus just closing some of his positions in his taxable account to retire his son's debt.
It's not mind-numbing at all. It's impossible. We have none of the information needed to do the math.
Not a helpful comment. What info do you need? Or, what are the considerations in answering the question by doing the math?
letsgobobby
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Re: How to help my son with law school loans?

Post by letsgobobby »

Why not just make his payments for him/gift money to him from current income? You don't need to sell assets and realize taxable gains and do this all at once. Just do it over time. If you want to restructure some of it into a low interest loan, sure - but why? You don't need the income, and he's a good guy.

ChrisC, some kids want to be independent from their families financially. Me on the other hand, I am not afraid to make a proposal to my family if it might be win win. So right now I owe my dad a mortgage for an investment property. I could have gotten a market loan, but borrowing from him was far easier, avoided certain costs, streamlined the purchase, and got me a market rate loan; meanwhile he gets a solid 3.25% over 12 years, more than the Treasury, and keeps the money in the family, and I'm a good credit risk. So maybe you need to offer her a face saving opportunity, give her a chance to pay interest for your benefit, rather than hers. Or maybe she just wants to do it on her own.
Calm Man
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Re: How to help my son with law school loans?

Post by Calm Man »

OP, however it is done, I was just talking to my daughter and thinking of you. I paid for her college and medical school. She could have taken loans and most of her friends have them. The lack of angst she has not having loans is worth the price of being a parent. With all of the assets you have, and a responsible soon who didn't "need to learn life's values" or something like that, why did you burden him with loans? But since he has them, why don't you just figure out a way and pay them off, period. That is priceless and beats anything material or a trip to some travel site. Good luck to him.
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Sinbad
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Re: How to help my son with law school loans?

Post by Sinbad »

Calm Man wrote:OP, however it is done, I was just talking to my daughter and thinking of you. I paid for her college and medical school. She could have taken loans and most of her friends have them. The lack of angst she has not having loans is worth the price of being a parent. With all of the assets you have, and a responsible soon who didn't "need to learn life's values" or something like that, why did you burden him with loans? But since he has them, why don't you just figure out a way and pay them off, period. That is priceless and beats anything material or a trip to some travel site. Good luck to him.
Guys, PARENTING advice is gratuitous and is actually not what I am looking for--my wife and have done a very good job with parenting and have been very generous within our means. Our means have evolved, and I am looking for FINANCIAL advice on the best way to pay down the loans from within my present assets and income.

The key question is, as previously stated, the following: Does it make sense to withdraw money from our taxable retirement account or to take an equity loan to pay off his loans. If I simply withdraw the money from my taxable account, I will pay cap gains and lose the investment appreciation. If I take an equity loan, I will pay interest (at a much lower rate than the cap gains), and the interest will be deductible. AND, I will still have the money in the taxable account invested and appreciating (hopefully).

So, while it is simpler to just pull the money out, pay the taxes, and pay the loans, I do wonder if the financing makes more sense via an equity loan. Heck, even if I then made the equity payments from the taxable account rather than from current accounts, I would be getting a deduction to offset the cap gains I would be paying.

Thanks for any help with this financial decision.
Bob's not my name
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Re: How to help my son with law school loans?

Post by Bob's not my name »

Sinbad wrote:
Bob's not my name wrote:
ChrisC wrote:I'm finding it a bit mind-numbing to figure out whether financially he's better off taking out a home equity loan versus just closing some of his positions in his taxable account to retire his son's debt.
It's not mind-numbing at all. It's impossible. We have none of the information needed to do the math.
Not a helpful comment. What info do you need? Or, what are the considerations in answering the question by doing the math?
Bob's not my name wrote:You've never stated how much would be realized in capital gains if you liquidated the least appreciated assets in your taxable account, so we can't answer. Nor have you said what your LTCG tax rate will be this year with your wife working only part of the year and next year when she's not working at all.
I've also suggested two ways to mitigate capital gains tax.
adam1712
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Re: How to help my son with law school loans?

Post by adam1712 »

Sinbad wrote:
Bob's not my name wrote:
ChrisC wrote:I'm finding it a bit mind-numbing to figure out whether financially he's better off taking out a home equity loan versus just closing some of his positions in his taxable account to retire his son's debt.
It's not mind-numbing at all. It's impossible. We have none of the information needed to do the math.
Not a helpful comment. What info do you need? Or, what are the considerations in answering the question by doing the math?

The main considerations would be 1) how much have the assets in your taxable account appreciated and 2) how long do you plan to hold the loan.

1) Say the taxable account has gained 20% (you want to sell the assets that have appreciated the least), then with a 15% tax rate, you'll have to pay 0.2*0.15 or 3% of the asset to taxes.

2) Say you keep the loan for 5 years and the rate is 4.5% but you're in the 25% marginal tax bracket so the effective rate is 3.375%. So for 5 years you'd pay about 17% of the loan in interest.

But all of this doesn't really matter that much. The big question is whether the stocks appreciate over the life of the loan. If stocks go up, taking the loan and using leverage wins. If stocks are flat, taking the loan loses.
Bob's not my name
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Re: How to help my son with law school loans?

Post by Bob's not my name »

adam1712 wrote:
Sinbad wrote:
Bob's not my name wrote:
ChrisC wrote:I'm finding it a bit mind-numbing to figure out whether financially he's better off taking out a home equity loan versus just closing some of his positions in his taxable account to retire his son's debt.
It's not mind-numbing at all. It's impossible. We have none of the information needed to do the math.
Not a helpful comment. What info do you need? Or, what are the considerations in answering the question by doing the math?

The main considerations would be 1) how much have the assets in your taxable account appreciated and 2) how long do you plan to hold the loan.

1) Say the taxable account has gained 20% (you want to sell the assets that have appreciated the least), then with a 15% tax rate, you'll have to pay 0.2*0.15 or 3% of the asset to taxes.

2) Say you keep the loan for 5 years and the rate is 4.5% but you're in the 25% marginal tax bracket so the effective rate is 3.375%. So for 5 years you'd pay about 17% of the loan in interest.

But all of this doesn't really matter that much. The big question is whether the stocks appreciate over the life of the loan. If stocks go up, taking the loan and using leverage wins. If stocks are flat, taking the loan loses.
And AGAIN, you may be able to avoid 15% tax on the gains because you can gift the stock.
sscritic
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Re: How to help my son with law school loans?

Post by sscritic »

I am always amazed when people ask financial questions (or any question) and think that facts don't matter.
ChrisC
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Re: How to help my son with law school loans?

Post by ChrisC »

letsgobobby wrote:ChrisC, some kids want to be independent from their families financially. Me on the other hand, I am not afraid to make a proposal to my family if it might be win win. So right now I owe my dad a mortgage for an investment property. I could have gotten a market loan, but borrowing from him was far easier, avoided certain costs, streamlined the purchase, and got me a market rate loan; meanwhile he gets a solid 3.25% over 12 years, more than the Treasury, and keeps the money in the family, and I'm a good credit risk. So maybe you need to offer her a face saving opportunity, give her a chance to pay interest for your benefit, rather than hers. Or maybe she just wants to do it on her own.
My kid just wants to do it on her own. We've framed the issue from the standpoint of us getting a better return on cash just sitting in jumbo money market savings accounts but she sees this as our being generous to the potential detriment of her siblings, as well sacrificing her own financial autonomy. She's very competitive with her siblings, especially as the youngest one with other high achieving siblings who have financed their own graduate/professional school educations.

Regarding the OP's financial issue, even if we had all available information to measure the spread between different approaches, how much of a difference could there be, especially if one could pay this from current income or cash? That's what I'm scratching my head about.
Bob's not my name
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Re: How to help my son with law school loans?

Post by Bob's not my name »

The cash approach is of course superior to liquidating stock or borrowing, unless this would draw down cash so much as to risk forcing a later stock sale in a tax-inefficient way.
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Re: How to help my son with law school loans?

Post by PoeticalDeportment »

ChrisC wrote:I would do that but my daughter is stubborn. She wants to be financially independent from her parents and insists she pay us back. Some of this is due to the way she's wired; some of this is due to her self-appointed role as the "equalizer" among her siblings -- she makes sure that siblings are treated "equally" in the family. In short, this type of parental financing would alter financial equality among siblings.
So you can help your daughter with the law school debt by gifting to her siblings an amount equal to her debt payment to you. This way, to maintain equality (and the order of the universe), she could use the money she was using to pay you to pay off her student debt faster. Hopefully she has responsible siblings.
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Re: How to help my son with law school loans?

Post by 2cents2 »

Sinbad wrote: The key question is, as previously stated, the following: Does it make sense to withdraw money from our taxable retirement account or to take an equity loan to pay off his loans. If I simply withdraw the money from my taxable account, I will pay cap gains and lose the investment appreciation. If I take an equity loan, I will pay interest (at a much lower rate than the cap gains), and the interest will be deductible. AND, I will still have the money in the taxable account invested and appreciating (hopefully).

So, while it is simpler to just pull the money out, pay the taxes, and pay the loans, I do wonder if the financing makes more sense via an equity loan. Heck, even if I then made the equity payments from the taxable account rather than from current accounts, I would be getting a deduction to offset the cap gains I would be paying.

Thanks for any help with this financial decision.
I don't think enough info has been provided to figure out which option would be more favorable. One aspect that I would be investigating is: making a TRANSFER of assets to your DS (as others have suggested). You might be able to save some money on cap gain taxes if your DS is in the 10% or 15% tax bracket with a LT capital gain rate of 0% (can't improve on that!).
Maybe you could do a combination of stuff--transfer assets, cash flow, pay the co-signed loans off directly... Maybe you could chat with your DS, so you could design the best way to preserve his tax breaks (I'm assuming he is able to write off interest on the loans?) and also minimize your cost?
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Re: How to help my son with law school loans?

Post by Bob's not my name »

2cents2 wrote:I'm assuming he is able to write off interest on the loans?
Bob's not my name wrote:
vachica wrote:I assume his income is over the student loan deduction threshold (75k AGI for singles).
Probably true but also irrelevant. The maximum deduction is $2,500, so the top $60,000 of his debt is not deductible regardless of his income.
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Re: How to help my son with law school loans?

Post by sscritic »

2cents2 wrote: I don't think enough info has been provided to figure out which option would be more favorable. One aspect that I would be investigating is: making a TRANSFER of assets to your DS (as others have suggested). You might be able to save some money on cap gain taxes if your DS is in the 10% or 15% tax bracket with a LT capital gain rate of 0% (can't improve on that!).
There are state taxes. There are potentially two different state rates. Do both parties itemize so that the state taxes paid reduce the federal taxes owed? Maybe this has all been revealed and I just missed it.
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Sinbad
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Re: How to help my son with law school loans?

Post by Sinbad »

adam1712 wrote:
Sinbad wrote:
Bob's not my name wrote:
ChrisC wrote:I'm finding it a bit mind-numbing to figure out whether financially he's better off taking out a home equity loan versus just closing some of his positions in his taxable account to retire his son's debt.
It's not mind-numbing at all. It's impossible. We have none of the information needed to do the math.
Not a helpful comment. What info do you need? Or, what are the considerations in answering the question by doing the math?

The main considerations would be 1) how much have the assets in your taxable account appreciated and 2) how long do you plan to hold the loan.

1) Say the taxable account has gained 20% (you want to sell the assets that have appreciated the least), then with a 15% tax rate, you'll have to pay 0.2*0.15 or 3% of the asset to taxes.

2) Say you keep the loan for 5 years and the rate is 4.5% but you're in the 25% marginal tax bracket so the effective rate is 3.375%. So for 5 years you'd pay about 17% of the loan in interest.

But all of this doesn't really matter that much. The big question is whether the stocks appreciate over the life of the loan. If stocks go up, taking the loan and using leverage wins. If stocks are flat, taking the loan loses.
Adam 1712,

Thank you. This is exactly the kind of information I needed. Most of the long term gains are in the area of 25-30%. Of course, the payment of interest on the loan would be in future dollars rather than the present dollars that would be used to pay taxes, and this would reduce the cost of the loan further. And my own investment stance is based on leaning toward the view that we have entered a long term secular bull market---soooo---I think I lean to the loan.

Actually, my wife and I are now in the 18.8% capital gains bracket, so that makes the loan even more attractive. Especially since after retirement we will drop out of that bracket.

Again, thank you--your comments were lucidly explained and very helpful.

Sinbad
Last edited by Sinbad on Sun Mar 23, 2014 3:58 pm, edited 1 time in total.
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Sinbad
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Re: How to help my son with law school loans?

Post by Sinbad »

2cents2 wrote:
Sinbad wrote: The key question is, as previously stated, the following: Does it make sense to withdraw money from our taxable retirement account or to take an equity loan to pay off his loans. If I simply withdraw the money from my taxable account, I will pay cap gains and lose the investment appreciation. If I take an equity loan, I will pay interest (at a much lower rate than the cap gains), and the interest will be deductible. AND, I will still have the money in the taxable account invested and appreciating (hopefully).

So, while it is simpler to just pull the money out, pay the taxes, and pay the loans, I do wonder if the financing makes more sense via an equity loan. Heck, even if I then made the equity payments from the taxable account rather than from current accounts, I would be getting a deduction to offset the cap gains I would be paying.

Thanks for any help with this financial decision.
I don't think enough info has been provided to figure out which option would be more favorable. One aspect that I would be investigating is: making a TRANSFER of assets to your DS (as others have suggested). You might be able to save some money on cap gain taxes if your DS is in the 10% or 15% tax bracket with a LT capital gain rate of 0% (can't improve on that!).
Maybe you could do a combination of stuff--transfer assets, cash flow, pay the co-signed loans off directly... Maybe you could chat with your DS, so you could design the best way to preserve his tax breaks (I'm assuming he is able to write off interest on the loans?) and also minimize your cost?
Good suggestions on whether he would lose the tax breaks on interest--but I don't think those are likely to be all that useful to him.

I had early in this thread already raised the idea of paying off the co-signer loans directly to maximize what my wife and I could give him under the gift tax limits and another poster has already posted a link indicating that this would be a legal way of doing things.

He is in the 15% capital gains bracket; my wife and I are in the 18.8% bracket. I think Adam1712's analysis holds up.
Last edited by Sinbad on Sun Mar 23, 2014 4:03 pm, edited 1 time in total.
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Re: How to help my son with law school loans?

Post by Sinbad »

sscritic wrote:
2cents2 wrote: I don't think enough info has been provided to figure out which option would be more favorable. One aspect that I would be investigating is: making a TRANSFER of assets to your DS (as others have suggested). You might be able to save some money on cap gain taxes if your DS is in the 10% or 15% tax bracket with a LT capital gain rate of 0% (can't improve on that!).
There are state taxes. There are potentially two different state rates. Do both parties itemize so that the state taxes paid reduce the federal taxes owed? Maybe this has all been revealed and I just missed it.
He's in the 15% bracket on cap gains, we are in the 18.8% bracket. Not much help to transfer securities.
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Re: How to help my son with law school loans?

Post by HomerJ »

ChrisC wrote:
Grt2bOutdoors wrote:
ChrisC wrote:
Something I'm thinking about as well. We also paid for all of our children's undergraduate educations. Youngest daughter has over $138K in loans from law school, at 6.5 percent interest. We're trying to convince her to let us "refinance" these loans by having us pay off the loans and have her take out a loan from us at 2-3 percent interest over a long repayment period. This would greatly reduce her debt service payments. She graduated last year and is fortunate to have a well paid job. Right now she's mired in work, has an aggressive loan repayment schedule, and does not want our help. We're having difficulty talking financial sense to her about our proposal. (We did advance her some money before she started work and she is paying that money back to us -- no interest on the advance.)
Think about this - stop accepting anymore repayments from her in regards to your advance before she started work. Instead, tell her to take those payments and use it to reduce the balance of her law school loans. Now you will have accomplished two things; one you will reduce her interest expense burden and two - you will reduce her overall level of debt service. Mission accomplished.
I would do that but my daughter is stubborn. She wants to be financially independent from her parents and insists she pay us back. Some of this is due to the way she's wired; some of this is due to her self-appointed role as the "equalizer" among her siblings -- she makes sure that siblings are treated "equally" in the family. In short, this type of parental financing would alter financial equality among siblings.
You should absolutely respect this. She will feel (and be) a real adult when she pays it off herself.

You guys need to be careful to not give too much... Being proud of your accomplishments is important... Having "Daddy" help out when you're an adult can be complicated.
Last edited by HomerJ on Sun Mar 23, 2014 4:14 pm, edited 1 time in total.
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Re: How to help my son with law school loans?

Post by sscritic »

Sinbad wrote:
sscritic wrote:There are potentially two different state rates.
He's in the 15% bracket on cap gains, we are in the 18.8% bracket. Not much help to transfer securities.
Which state has a 15% tax on capital gains? Which state has an 18.8% tax on capital gains? California tops out at 13.3%. Are both your states higher than that?
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Re: How to help my son with law school loans?

Post by HomerJ »

Sinbad wrote:The key question is, as previously stated, the following: Does it make sense to withdraw money from our taxable retirement account or to take an equity loan to pay off his loans. If I simply withdraw the money from my taxable account, I will pay cap gains and lose the investment appreciation. If I take an equity loan, I will pay interest (at a much lower rate than the cap gains), and the interest will be deductible. AND, I will still have the money in the taxable account invested and appreciating (hopefully).

So, while it is simpler to just pull the money out, pay the taxes, and pay the loans, I do wonder if the financing makes more sense via an equity loan. Heck, even if I then made the equity payments from the taxable account rather than from current accounts, I would be getting a deduction to offset the cap gains I would be paying.

Thanks for any help with this financial decision.
If you pull out $100k from your taxable account, you're not going to pay capital gains on the entire 100k... Some of it will be principal... You need to compare the 15% on the partial amount that will have capital gains to the interest on the entire 100k loan. Or like someone else said, gift the stock to your son, and there's ZERO capital gains... That certainly beats a loan, right?

It just goes against my nature to borrow money when you have the cash right there. I think you're making this way too complicated.
Last edited by HomerJ on Sun Mar 23, 2014 4:17 pm, edited 2 times in total.
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Re: How to help my son with law school loans?

Post by HomerJ »

PoeticalDeportment wrote:
ChrisC wrote:I would do that but my daughter is stubborn. She wants to be financially independent from her parents and insists she pay us back. Some of this is due to the way she's wired; some of this is due to her self-appointed role as the "equalizer" among her siblings -- she makes sure that siblings are treated "equally" in the family. In short, this type of parental financing would alter financial equality among siblings.
So you can help your daughter with the law school debt by gifting to her siblings an amount equal to her debt payment to you. This way, to maintain equality (and the order of the universe), she could use the money she was using to pay you to pay off her student debt faster. Hopefully she has responsible siblings.
Yeah, hopefully she has responsible siblings.. Guys, part of the reasons most of us worked hard and have the money we have is because we weren't handed money as young adults. I'm not saying handing money to your kids is bad, but it's complicated. You have to be careful. I know we want to make it easier for them, but money being tight when you're in your 20s is quite likely a GOOD thing... You're still there for emergencies... They know they can always turn to you. We shouldn't try to make our kids lives TOO easy... It's a tough balance.
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Re: How to help my son with law school loans?

Post by pshonore »

Bob's not my name wrote:
adam1712 wrote:
Sinbad wrote:
Bob's not my name wrote:
ChrisC wrote:I'm finding it a bit mind-numbing to figure out whether financially he's better off taking out a home equity loan versus just closing some of his positions in his taxable account to retire his son's debt.
It's not mind-numbing at all. It's impossible. We have none of the information needed to do the math.
Not a helpful comment. What info do you need? Or, what are the considerations in answering the question by doing the math?

The main considerations would be 1) how much have the assets in your taxable account appreciated and 2) how long do you plan to hold the loan.

1) Say the taxable account has gained 20% (you want to sell the assets that have appreciated the least), then with a 15% tax rate, you'll have to pay 0.2*0.15 or 3% of the asset to taxes.

2) Say you keep the loan for 5 years and the rate is 4.5% but you're in the 25% marginal tax bracket so the effective rate is 3.375%. So for 5 years you'd pay about 17% of the loan in interest.

But all of this doesn't really matter that much. The big question is whether the stocks appreciate over the life of the loan. If stocks go up, taking the loan and using leverage wins. If stocks are flat, taking the loan loses.
And AGAIN, you may be able to avoid 15% tax on the gains because you can gift the stock.
Isn't he subject to the Kiddie tax if student has more than 2K of investment income ?
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Re: How to help my son with law school loans?

Post by Sinbad »

sscritic wrote:
Sinbad wrote:
sscritic wrote:There are potentially two different state rates.
He's in the 15% bracket on cap gains, we are in the 18.8% bracket. Not much help to transfer securities.
Which state has a 15% tax on capital gains? Which state has an 18.8% tax on capital gains? California tops out at 13.3%. Are both your states higher than that?
I was talking about the federal rate. My state's top capital gains rate is 8.82, which makes the argument for the loan even more compelling.
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Re: How to help my son with law school loans?

Post by sscritic »

Sinbad wrote: I was talking about the federal rate. My state's top capital gains rate is 8.82, which makes the argument for the loan even more compelling.
You still haven't told us his rate. If his state rate is 3%, then ignoring the deduction for state taxes on the federal return, he pays 15 + 3 = 18 while you pay 18.8 + 8.8 = 27.6. That's a difference of almost 10%, but of course I had to make up his state rate. It could be higher or lower, which means the difference could be less or more.
There are potentially two different state rates
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Sinbad
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Re: How to help my son with law school loans?

Post by Sinbad »

sscritic wrote:
Sinbad wrote: I was talking about the federal rate. My state's top capital gains rate is 8.82, which makes the argument for the loan even more compelling.
You still haven't told us his rate. If his state rate is 3%, then ignoring the deduction for state taxes on the federal return, he pays 15 + 3 = 18 while you pay 18.8 + 8.8 = 27.6. That's a difference of almost 10%, but of course I had to make up his state rate. It could be higher or lower, which means the difference could be less or more.
There are potentially two different state rates
He lives in the same state (NY), so I assume his state capital gains would be the same. I think the only difference in his rate and mine would be 3.8%. However, the inclusion of the expense of state taxes capital gains taxes in the situation, and using the analysis provided by Adam1712, does I think favor doing the loan.

Also, I don't know how much of the deduction of state taxes from federal taxes I will get because I think I will get hit by the AMT. [OT comment removed by admin LadyGeek]
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Sinbad
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Re: How to help my son with law school loans?

Post by Sinbad »

[OT comments removed by admin LadyGeek]
[Response to OT comments removed by admin LadyGeek] We have worked hard and saved and have earned every dollar we have. We have three highly demanding jobs between the two of us. I work two jobs, have upteen thousands of dollars invested in my professional education and skills, and my wife works full-time and gets up at 5:15 am every morning to go to her job. We are both 64 and have worked every year of our lives since our teen years. [Response to OT comments removed by admin LadyGeek]
adam1712
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Re: How to help my son with law school loans?

Post by adam1712 »

I'm still really confused how you can have the income to be in the 18.8% capital gains tax bracket and have to sell stocks to gift money to your son.
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