Wisdom of Replacing Fed Loans w/ Loans to Parents

Discuss various money matters here. Loans (federal and private), scholarships, lottery winnings, or other school finance related information and queries.
abl
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Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby abl » Sun May 12, 2013 2:27 pm

Here's the deal:

I graduated from a T6 law school with about $70,000 in debt. I'm considering doing public interest work, in which case my school's loan repayment will pay off most or all of that. I'm also considering getting one of those rare ~$50-70,000 positions, in which case I will not get loan assistance from my school (or will only get a negligible amount) and will also not make enough money to make repayment a breeze. I suspect this is the most likely alternative for me. There's also a remote possibility I could work at a biglaw firm (I have an outstanding offer). I managed to take out only Stafford (sub & unsub) and Perkins loans, and have entered repayment.

I'm in the fortunate position to have parents with some disposable income and a stellar credit history (mine is also good). There's a chance that they would consider loaning me the ~$70,000 at the same/similar fixed interest rate that they are able to get -- we think probably around 4-4.5%.

To me, this seems like an easy call -- if I can get a <5% fixed rate loan from my parents and use it to pay off my Stafford/Perkins loans (totaling around 6% interest), why shouldn't I? Only because I think it's relevant to the question, I'm not worried about getting jobs for the foreseeable future (top 5%, LR, federal clerkships). I would lose any benefits that come from federal loans but I'm not planning on doing PAYE or IBR or anything of the sort -- at most, I would take advantage of my law school's loan repayment program which I don't think will be impacted by this (I have to look into that more). What are the potential disadvantages and pitfalls of going this route? Will it negatively impact my credit score? (My understanding is that my credit report will reflect me paying off my federal loans about 8 years early, which strikes me as being only a good thing.) Are there other benefits that I'm missing out on? Are there costs I'm overlooking? My parents are a little nervous about me owing them money, but I think would be willing to help out if it was a clear call -- and I'm trying to do my due diligence.

Thanks!

paul554
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby paul554 » Sun May 12, 2013 4:53 pm

abl wrote: My parents are a little nervous about me owing them money


This really is the only thing that matters in the end. If you can't repay this money and it causes stress with your family then it is probably not worth it. In the end your only saving a small amount on interest since your loans are around 60K, at the same time though what happens if something happens and your parents need the money paid back sooner? What if something happens to you and you can't afford to pay any money back for extended periods, or (and you'll say this won't happen but you never know) something happens where you don't feel you should have to repay them! Getting loans from direct family members is never a good idea in my opinion since it normally will lead to some type of strife or trouble. If your parents want to GIVE you 60K that's another story, but I'd suggest just getting the loans from your Uncle Sam.

jmdogg88
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby jmdogg88 » Sun May 12, 2013 5:06 pm

One big ole benefit of having your parents take out that loan is that if for some reason you are unable to make a payment one particular month, your parents will be more likely than Uncle Sam to cut you some slack and your credit won't be dinged. If your parents can afford to do that and you have a strong relationship, it seems like a good bet. You're probably going to want a house one day and a lowered credit score could end up costing you a boat load of cash when you put your name on the dotted line.

Bottom line (literally): You know it's your debt. Your parents know it's your debt. As long as you attack it like you would if you were flying solo, everyone except the government wins.

abl
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby abl » Fri Jun 21, 2013 5:11 pm

more thoughts?

arklaw13
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby arklaw13 » Fri Jun 21, 2013 9:07 pm

You may not get a LRAP-eligible job (or one that it would help much) at first, but by borrowing from your parents you're foreclosing on the possibility of lateraling to one in the near future and being able to take advantage of your school's LRAP.

JJ123
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby JJ123 » Tue Jul 02, 2013 2:18 pm

I don't think you can take a for AGI deduction for the student loan interest if it's to your parents.

So, you should be analyzing the after-tax interest cost of the loans.

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Joe Quincy
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby Joe Quincy » Tue Jul 02, 2013 2:25 pm

JJ123 wrote:I don't think you can take a for AGI deduction for the student loan interest if it's to your parents.

So, you should be analyzing the after-tax interest cost of the loans.


That deduction phases out completely with a MAGI of $75,000 (single) or $150,000 (married) and the phaseout starts at like $60K. So in reality, most people don't benefit from this deduction unless they go into public interest. Even government lawyers will hit the phaseout in the first few years (at the latest).

If you're below the cut out, your effective tax rate will be pretty low anyhow and the deduction is capped at $2,500...so at most you'd lose $200-$400 a year in tax savings. If they can get a loan without an origination fee, that alone would probably make up for any lost deductions over the course of the loan.

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you'rethemannowdawg
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby you'rethemannowdawg » Wed Jul 03, 2013 11:16 am

It all depends on how the loan will affect your relationship with your parents. If the 70k is no sweat to them, that's definitely better than having non-dischargeable fed loans at the higher interest rate. Your parents aren't going to damage your credit or refer you to a collection agency.

But if the 70k is somewhat of a burden to them and it could strain your relationship, not worth it for the extra few thousand you'll save.

Loaning money is a business transaction. Treating your parents as economic partners for that amount of money could drastically change things.

JJ123
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby JJ123 » Wed Jul 03, 2013 11:20 am

The other possibility here is that the Feds may consider your lower-interest-rate loan to be a gift. I don't know all of the tax rules for it, and I don't have time to look them up, but it is a possibility.

mojangles
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby mojangles » Wed Jul 03, 2013 11:49 am

JJ123 wrote:The other possibility here is that the Feds may consider your lower-interest-rate loan to be a gift. I don't know all of the tax rules for it, and I don't have time to look them up, but it is a possibility.


if i'm not mistaken, you can give a 14k gift annually without tax consequences. above 14k there are taxes, but you can fill out paperwork to deduct it from your overall estate at the time you die (up to 5mil of your estate is tax free at your death, less any amount that its reduced by gifts)

JJ123
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby JJ123 » Wed Jul 03, 2013 1:58 pm

mojangles wrote:
JJ123 wrote:The other possibility here is that the Feds may consider your lower-interest-rate loan to be a gift. I don't know all of the tax rules for it, and I don't have time to look them up, but it is a possibility.


if i'm not mistaken, you can give a 14k gift annually without tax consequences. above 14k there are taxes, but you can fill out paperwork to deduct it from your overall estate at the time you die (up to 5mil of your estate is tax free at your death, less any amount that its reduced by gifts)


There is an exemption. I don't know if it applies to loans. If someone feels like looking it up...

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Tiago Splitter
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Re: Wisdom of Replacing Fed Loans w/ Loans to Parents

Postby Tiago Splitter » Wed Jul 03, 2013 2:00 pm

JJ123 wrote:
mojangles wrote:
JJ123 wrote:The other possibility here is that the Feds may consider your lower-interest-rate loan to be a gift. I don't know all of the tax rules for it, and I don't have time to look them up, but it is a possibility.


if i'm not mistaken, you can give a 14k gift annually without tax consequences. above 14k there are taxes, but you can fill out paperwork to deduct it from your overall estate at the time you die (up to 5mil of your estate is tax free at your death, less any amount that its reduced by gifts)


There is an exemption. I don't know if it applies to loans. If someone feels like looking it up...

It applies to gifts. The amount of money you save by getting a loan through your parents compared to what it would cost through conventional channels is considered a gift.




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