Finance kids' medical educations with a HELOC?

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DigitalJanitor
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Finance kids' medical educations with a HELOC?

Post by DigitalJanitor »

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?
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Re: Finance kids' medical educations with a HELOC?

Post by bnes »

There's no need or reason to do it without "formal legal documents". The source of your cash does not matter: to the kids it can be a loan with terms, penalties, etc.
LeeMKE
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Re: Finance kids' medical educations with a HELOC?

Post by LeeMKE »

+1 bnes

The IRS will give you less trouble if you put the arrangement in writing. My father in law did something similar for us, and we repaid with a lower interest rate than we would have had otherwise. You can "gift" some/all of the interest back to them each year if you like. But for everyone's sake, it should be in writing. They will appreciate being able to plan around a specific payback arrangement, and you will have more certainty about your own future cash flow. No need to have the uncertainty and anxiety of not having this important detail in writing that can be referred to later when folks (both you and they) are laying future plans.
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BL
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Re: Finance kids' medical educations with a HELOC?

Post by BL »

I agree things should be in writing. Also keep in mind that you may be dealing with future spouses if this is a long-term contract. You can always gift the interest or whatever in the future.
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ResearchMed
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Re: Finance kids' medical educations with a HELOC?

Post by ResearchMed »

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...

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JDCarpenter
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Re: Finance kids' medical educations with a HELOC?

Post by JDCarpenter »

LeeMKE wrote:+1 bnes

The IRS will give you less trouble if you put the arrangement in writing. My father in law did something similar for us, and we repaid with a lower interest rate than we would have had otherwise. You can "gift" some/all of the interest back to them each year if you like. But for everyone's sake, it should be in writing. They will appreciate being able to plan around a specific payback arrangement, and you will have more certainty about your own future cash flow. No need to have the uncertainty and anxiety of not having this important detail in writing that can be referred to later when folks (both you and they) are laying future plans.
+1

Much safer to have it in writing, and meet the IRS interest requirements, which remain quite reasonable: http://apps.irs.gov/app/picklist/list/federalRates.html (generally, there is a lot of discussion of "applicable federal rates" on the web if you haven't run into it yet)

FIL did this for DW's med, and we are doing it for one of our son's living expenses in law school. (He pays us interest each month; alternatively, you could gift the interest payments, or roll it into the loan amount).

Loan documentation was/is a one paragraph promissory note.
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AFdoc
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Re: Finance kids' medical educations with a HELOC?

Post by AFdoc »

This really doesn't sound like too bad an idea and it's definitely a way to help your kids without just giving them the money outright. Agree with putting something in writing though, as it'll define what's owed and repayment terms. One suggestion is to see what is offered in terms of inexpensive loans when they apply - they may be able to get some subsidized Stafford loans or other low-cost financing methods as well. Though the student loan landscape is a lot less generous now than it was 10 years ago, they may still benefit.
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Re: Finance kids' medical educations with a HELOC?

Post by goodenyou »

I think this is a very risky idea. Lending money that is vital to the well-being to one (retirement) in order to help another can be a big problem. Money lending to family and friends is never a good idea. If you lend money to family with the knowledge that it may not be payed back (and you are not depending on it being payed back), then you accept the risk. I would not roll the dice in any way with my retirement. You are playing with fire. Let them take out loans, and if you are in a position later, and they need the help, then help when you are capable without accepting undue risk to your future retirement. What if the student hates medicine after spending all the money on education? What if there is illness? What if they can't pay it back fast enough because the economics of medicine are changing? What if they choose a lower paying specialty? Lending money to one child can also cause problems with the others. There is a lot to consider.
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SimonJester
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Re: Finance kids' medical educations with a HELOC?

Post by SimonJester »

No way would I do this, way too much risk. You said you need the money so it must be paid back. What would you do if something happened and your child was unable to finish school due to illness or worse. What if they lose their job down the road and cannot pay you back?

Medical school is expensive, but if son finishes and stick to a low cost lifestyle afterwords he can pay back the loans in short order.

As for nursing school I cash flowed my wife's RN degree without any loans. You already paid for undergraduate degrees, they or their employer should pay for the graduate degree.
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Re: Finance kids' medical educations with a HELOC?

Post by bungalow10 »

If you do this, make sure you take out term life insurance plans on both kids. If they die, student loans are forgiven. HELOCs are not.
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anonforthis
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Re: Finance kids' medical educations with a HELOC?

Post by anonforthis »

Bad idea. If you can't afford to give it then they need to go the bank. You may lose a good relationship over this.
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Re: Finance kids' medical educations with a HELOC?

Post by staythecourse »

I'm sorry to have to be on the side of don't do it.

The key is this is money you NEED to survive in your own retirement. Basically, you are saying "I will take the money I need to retire on and put it into two unsecured bonds". That is not a good investing move. In my opinion, them being family members makes the proposition much harder as emotions get into it. If they do not pay are you really going to take them to court and sue them?

There are SO MANY reasons they may not pay. What if they get sick, quit, die, get married and the spouse gets involved (they will have their say in the matter), can't pay it off, etc...

These are too many unknowns to bet your retirement savings on.

I would, as recommended, let them take out the loans beyond what you can afford without tapping into retirement. As time goes on if you are doing better then you thought then gift them the money to pay it down themselves. That leaves the control with you.

Good luck.
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Re: Finance kids' medical educations with a HELOC?

Post by market timer »

DigitalJanitor wrote:Are there downsides to this plan that I’ve missed? Better alternatives that I haven’t considered?
I think the most likely problem is that one of your children decides to pursue a career for which loan forgiveness would have been possible. The rules on loan forgiveness are still evolving and expanding. My suggestion is to let them take out the loans while in school, then consider refinancing their loans once they graduate, have jobs, and the future is a bit clearer. In fact, there are private lenders who will do this refinance at a rate similar to your HELOC if your children have jobs and are good credit risks once they graduate. Much can happen between now and the time your son graduates from med school (2019) and your daughter graduates from nursing school (2021?).
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Re: Finance kids' medical educations with a HELOC?

Post by NoVa Lurker »

One additional downside is the tension this will create if your son or daughter decide that medicine is just not for them, after racking up loans.

If the loans are directly to them, from a financial institution, then the decision is theirs.

If the loans are from you, then it will only make things tougher for them.

I have a good friend who did 2 years of medical school, then dropped out. Fifteen years later, all his loans have long been repaid, and he makes nearly seven figures. But in those initial years after dropping out, it was tough. His family was also not supportive of the decision to drop out. Now he has a great relationship with both his parents, and they are happily (and prosperously) retired. I think it would have risked those relationships if there were family loans involved.

Anyway, best of luck.
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Re: Finance kids' medical educations with a HELOC?

Post by Grt2bOutdoors »

Do you like your house? Do you want to keep it in retirement? For all of the reasons the other posters have stated, plus the fact you need this money to retire - at the minimum you should purchase a life insurance policy on them payable to you for the amount of the loans - that only takes care of death, it does not address the potential for them to be disabled or if they drop out of school. How will you address this risk? Are you willing to downsize your retirement if the loans go south with the geese but fail to reappear in the form of monthly repayment? Good Luck! I don't envy this situation.
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Re: Finance kids' medical educations with a HELOC?

Post by JDCarpenter »

Just came back to this thread. My Bad on my earlier response suggesting best way to structure the loan. I missed the express statement that you need this money for your retirement. We were not really in that position, as son got scholarship and only needed living expenses, which meant that the amount of the loan would, at most, only cause us to work another 3 to 6 months if he were to be struck by lightning tomorrow.

All of the other stuff regarding family strife, etc., I put in the YMMV (and "document it") category, but the consensus here regarding the need to put retirement first is more on point (and better read) than my first comment.
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Re: Finance kids' medical educations with a HELOC?

Post by MathWizard »

I would still say that you should have them take out the loans themselves.

If they are not willing to bet the loans against their career, you should not either.
Only if they absolutely cannot take out loans should you even consider this.

Once you are secure in your retirement, and they have graduated, can you help them in
repaying the loans (or maybe instead matching money they put in an IRA).

The only exception I would see to this is if it is a family social contract (I have friends
whose parents put them through grad school, and instead of getting repaid, they said "Do the same for your kids".
Then I would consider it repayment of an obligation.
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Re: Finance kids' medical educations with a HELOC?

Post by inbox788 »

DigitalJanitor wrote:The goal is to minimize the total interest paid by the whole family.
If you had $200,000 in taxable Total Stock Market account, would you sell it all to pay for the educational expenses instead of taking out loans? The rate of the loans and any subsidies may be the significant.

The reason I ask the question is that you (i.e. your children) could alternatively take the loan and you could take the payments going to the HELOC and invest it in TSM or more suitable vehicle if available. It's pretty much the pay off student loan or mortgage vs. invest the cash question that often has positive expected return with investing, but carries some risk. In your situation, there are some risk mitigating options, like separating asset holders and liability, which in some rare situations can be big. For example, if a borrower dies, the loan is written off, but any assets you hold are still yours. Without assets or loan, the only way to recoup in that situation is to have a life insurance policy. Consider some of the interest you pay as a small payment for life insurance. What about disability insurance?

Minimizing the total interest paid may not yield the maximum expected cash stream from your and your children s income offsetting the educational expense. Taxes on investments may be a deterrent, but tax advantaged account may change the calculus. Also, student loan interest may be deductible, so you could wind up with a win/win on interest rates (5% deductible student loan, 6% tax-free return expected from investment in Roth).
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Re: Finance kids' medical educations with a HELOC?

Post by letsgobobby »

DigitalJanitor wrote:I can’t think of a better place to invest my money than between their respective ears...

I would not charge them interest on any principal balance they have with me; this would be a gift to them.
An investment has an expectation of positive return. Your so-called investment has a negative expected return (you have to pay interest on the HELOC).

I see no reason to do this at all.

Your kids should borrow money for school.

If you want to, take out a HELOC and start paying down the loans.

If you want to have them save money by paying lower interest rates, draw up loan documents with them and charge them a fair rate of interest (the IRS may otherwise consider unpaid interest as a gift).

I don't know how much nursing school costs, but med school will cost, what, $200,000? Can you afford to pay $200,000 back if something happens to your son (god forbid)? Disability? Burns out of med school? Graduates but never works? Becomes a stay at home dad? I know lots of med school students who have the debt but not the career.

At the very least you should take out a sizable life insurance policy on both kids.
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Re: Finance kids' medical educations with a HELOC?

Post by placeholder »

The other solution kind is after they graduate and start paying back student loans then take out a home loan and pay a portion representing part of the student loan interest as a gift as that will at least help them out.
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Re: Finance kids' medical educations with a HELOC?

Post by mhalley »

I will come out against the heloc. The student loan debt will be large, but there are multiple ways to help mitigate this. They can join the military or practice in an under served area (Clark Howard had someone call in today that had 100k of med school debt forgiven for working 2 years in NY). Some jobs may have a sign on bonus that pays a portion of their debt. Some other advantages: Federal Student loan debt may be forgiven due to death. If the doctoring doesn't work out, then there are income based repayment programs.
If you are able to help the kids out some while in school, they won't have to take out as much debt. Also, if they don't go out of state or to the Ivy league programs, the debts will be much less. Or they could work a couple of years and save up some money before starting med school.
You have already helped them out a lot by getting them this far, don't sink your retirement by feeling obligated to pay for all their education. My parents were not able to give me one red cent to go to college and med school, and I did fine. It didn't cost an arm and a leg like it does now, but the GI bill and student loans was the reason I was able to do it.
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Re: Finance kids' medical educations with a HELOC?

Post by Herekittykitty »

If you don't have the resources to pay outright for their medical and graduate nursing education, you don't have the resources to put your home at risk with a HELOC. Especially since you are 10 years till retirement and neither of them will be done with their education until shortly before you retire. Medical school plus residency takes 7 years with the shortest residency possible. I don't know how long the nursing student will be in school but you will be within 7-8 years of retirement by the time she starts.

You have already helped them a lot. If you want to send a monthly check to the medical student for the first 2 years of medical school to reduce the amount he will need to borrow and then once the nursing student starts, switch to sending her the monthly check for 2 years, that would be okay, assuming you can budget in some amount each month. Even if it were, say, $500 a month, that would buy a lot of groceries and would mean that much less they were borrowing.

Do keep in mind that you do not owe this to them, it is something you want to do, which is fine if you are in financial position to do it. But to put your home at risk - bearing in mind it will still be at risk after you are retired - that is a terrible idea.

You may want to have a look at The White Coat Investor - a fine book written by a forum member who is an emergency physician, and which is available through the Amazon link on this page (clicking on the Amazon link gives a small referral fee to this site and doesn't cost you anything.) He paid his own way and paid off his own loans and is doing quite well. It is a great book. I keep several to give to interested medical students I work with.

By the way - I am a doctor who paid my own medial school loans and never considered that my parents should have covered my medical school expenses or paid off my loans.

Your heart is in the right place and it looks like you have kids to be proud of. It is just that what you suggest is a terrible idea.
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Re: Finance kids' medical educations with a HELOC?

Post by msj16 »

It doesn't have to be all or nothing. Depending upon how risky the situation is for you (i.e., how much you have in retirement already) you might loan half the amount and expect them to take out loans as well (perhaps in the later years so that it can be more quickly paid off once they graduate.
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DigitalJanitor
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Re: Finance kids' medical educations with a HELOC?

Post by DigitalJanitor »

Thank you all for your great advice and suggestions so far. Most of you think this is a bad idea, mostly because of the risk to our house and our retirement. (BTW, my wife is strongly against it.) Many of you made good cases for my kids borrowing on their own: loan forgiveness programs, sign-on bonuses, military service. I also appreciate the many technical suggestions: documenting the loan, tax issues, gift limits, term life insurance, refinancing from private lenders once the kids have jobs, etc. You can't buy better advice.

I've definitely cooled off on the idea of me taking on debt (though part of me still wants to put to work some of the equity that is locked up in our house). I think we can still help the kids significantly by lending them what we can afford, and having them borrow the rest.
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Re: Finance kids' medical educations with a HELOC?

Post by Herekittykitty »

DigitalJanitor wrote:Thank you all for your great advice and suggestions so far. Most of you think this is a bad idea, mostly because of the risk to our house and our retirement. (BTW, my wife is strongly against it.)

Yep - most of us do think it is a bad idea and the fact that your wife is strongly against it is a very big deal.

Many of you made good cases for my kids borrowing on their own: loan forgiveness programs, sign-on bonuses, military service. I also appreciate the many technical suggestions: documenting the loan, tax issues, gift limits, term life insurance, refinancing from private lenders once the kids have jobs, etc. You can't buy better advice.

True! And you can also get advice specific to doctors from The White Coat Investor which I advise you to buy and read and to give your son a copy too. Likewise your daughter if she is going to be a high earner in her nursing career.


I've definitely cooled off on the idea of me taking on debt

Great!

(though part of me still wants to put to work some of the equity that is locked up in our house).


That is a very scary way of looking at it and I encourage you to stop thinking of equity in your home as something that is "locked up" or that you need to "put to work." It is not "locked up." It does not need to do more "work." That is just plain nuts. You own a home which is providing a secure place to live now and will be a secure place to live in retirement. It isn't a piggy bank. It isn't a gambling fund. It is a home and it will be part of a secure future if you keep in mind it is a home and not a piggy bank or a gambling fund.


I think we can still help the kids significantly by lending them what we can afford, and having them borrow the rest.

Um - how does being the Bank of Mom and Dad help the two presumably responsible adults you have raised more than their earning by work between semesters, frugal but healthy living, grants for which they should apply, and loans from a real bank?

What will do them the most good is to have confidence in them to provide their own graduate educations.

If you have the money in your budget - and only if the money is in your budget (I am seeing no indication that it is) - could you send them a check as a gift to reduce the amount they need to borrow, or to provide groceries to reduce their grocery bill, or to take them shopping for clothes or other household items. But only if the money is in your budget - which I assume it isn't or you wouldn't be wanting to continue to fund these adults by putting your home and retirement at risk. If there is money in your budget, I would make it a gift and not a loan.

What your kids need most from you and their mother is your love, your confidence in them as adults, and your pride in their accomplishments. And they need you and their mother to secure your own retirement.

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