DigitalJanitor wrote:My son will be starting medical school in 2015, and my daughter will be starting graduate nursing school in 2017. I paid for their undergraduate education, but I don't have the resources to pay outright for their medical educations. Normal education loans will leave them saddled with a great deal of debt for a very long time, so I’m considering loaning them the money myself, and financing it with a HELOC.
The goal is to minimize the total interest paid by the whole family. Any loans that I make to the kids would have to be paid back; my wife and I need the money after we've retired. The kids are super bright and have a great work/study ethic. We are a very close family. I can’t think of a better place to invest my money than between their respective ears.
My thinking is that I would lend them the tuition out of the HELOC, pay back the HELOC principal and interest myself, and have them pay me back for these once their careers have started. I would not charge them interest on any principal balance they have with me; this would be a gift to them. I would pocket any tax deduction on the HELOC interest paid.
Pros:
- Interest rates are lower for HELOCs than for education loans.
- Tax deductions are bigger for HELOC interest than for education loan interest.
- I can start paying back the HELOC immediately, and over a shorter period of time.
- The kids have more flexibility in paying me back.
Cons:
- Potential for default (not likely) or deferred payback due to unforeseen personal situation.
- Absence of formal legal documents means no recourse in the case of default.
- A reversal in my own fortunes could risk the loss of the house.
My financial situation: secure job, well paid, no debt, excellent credit, house worth more than the cost of both educations combined, will retire in 10 years on a pension and decent 401k/IRA.
So, Bogleheads: is this wise? Are there downsides to this plan that I’ve missed? Better alternatives that I haven’t considered?
Here is the key, where you wrote:
"
... Any loans that I make to the kids would have to be paid back; my wife and I need the money after we've retired.... "
[emphasis added]
No matter HOW well your family gets along now, things could change: illness in a child, difficulty getting a job, marital/family problems/illness/divorce in an adult child's family, or just some sort of sudden (or less sudden) personality/sense of responsibility change. It happens.
Perhaps you could arrange some sort of middle ground, one that helps your children with their advanced professional/educational goals, but without leaving you holding the [empty] bag should any of a variety of things head south.
Consider having them take out the loans, especially if there is any type of interest-free period for some years, but even if that isn't the case. (Your HELOC isn't going to be interest-free.)
Then consider how you might be willing (assuming remaining able, that YOU don't have unexpected illness/other bills) to HELP them pay off those loans.
For example, something like paying half the monthly payments, once due, or matching them? (The former has the benefit of easier cash flow for child when first starting out; the latter has the benefit of paying off the loan faster, but is easier for *you* if you need to cut back temporarily or longer.)
And either way, get it is WRITING, truly "official", and make sure that any interest charged, to the extent the money you pay is a loan (and is over the annual gift amount allowed), is a percentage allowed to be a legal "loan". (It's not onerous, definitely much less than most commercial loans, so it gives you the advantage there that you want, plus the interest goes to a family member - you - not some other business entity.)
There are other ways to be creative about this without risking your own retirement so much as taking out a big loan, should things not work out so well for you and/or one or more child.
This isn't meant to sound harsh; it's meant to encourage prudent thinking in addition to the general parental desire to help fledge the offspring...
RM
This signature is a placebo. You are in the control group.