If you have a family member willing to loan you money for school, you are fortunate. If you are generously lending money to help a family member pay for school, you might be a saint.
However, your good luck or generosity can quickly become misfortune if you are not careful. Money issues between family members are notoriously tricky.
For this reason, it is critical to discuss several topics before any money changes hands. An awkward conversation today could ensure the survival of a meaningful relationship and help avoid a very ugly situation in the future.
Don’t ask for tuition help. Only offer what you can afford to lose.
Asking someone for help paying for college is asking for trouble. You are putting a family member in an awkward position, and if they help, they may resent you for asking.
Likewise, volunteering to help pay for school is a huge commitment. Even if you are loaning money and charging interest, you still need to assume that you might never see that money again.
Be very clear about loan terms.
When it comes to helping someone pay for college, the line between a gift and a loan can get blurry if you are not careful.
If a student thinks they received a gift while the family member thinks they offered a loan, it makes for an ugly situation. An undergraduate education typically takes four to five years, and in that time, memories can fade.
Drafting a contract might make it seem like you don’t trust the other person, but it is a great way to ensure that everyone understands what is supposed to happen.
Discussing the difference between a loan and a gift is essential—however, other details matter. Repayment terms like interest rate and how long you have to repay the loan are pretty obvious. However, there are additional details to consider.
Discuss what happens if you can’t pay.
Everyone goes to college with the expectation that it will lead to a great career and be a worthwhile investment. In many cases, this assumption holds true.
Unfortuantely, there are times when things don’t go according to plan.
You might not find a job. How will you repay your family member if you don’t have a job? If the economy turns and you face a rough job market, what are the expectations in that situation?
You might not graduate. Nobody goes to college expecting to drop out, but it happens all of the time. Repaying student loans is especially difficult for people who don’t get a degree.
Talk about what to do if something happens to either of you.
Sometimes health and outside circumstances derail your plans. What happens if the student borrower becomes disabled and can’t repay the loans? What happens if the family member passes away before the borrower can repay the debt?
These are complicated situations even to consider, but they are real possibilities that must be accounted for.
Make sure everyone is on the same page.
In most student loan contracts, there is a lender and a borrower, and nobody else is involved.
In a family lending/gift situation, circumstances are much different. If grandma pays for one grandchild to attend college, do all the other grandchildren expect the same help?
Jealousy can make a nice gesture turn sour very quickly.
Cosigning a loan might be better.
Sometimes a traditional student loan works better than less formal help from a family member.
Cosigning a loan is a huge responsibility, but it can make a huge difference in paying for college. A typical student loan also has detailed provisions covering all difficult conversations that are otherwise necessary.
By cosigning, you can avoid gift taxes that might otherwise complicate helping pay for school.
Just make sure you shop around to get the lowest interest rate and best loan terms available.