Robbing Peter to Pay Paul - Any Downside? Forum

[wisc130]

I am attending law school in the fall. Fortunately, I have a generous scholarship and likely do not need to take out any student loans to cover tuition or COL. My S.O., however, has significant student loan debt. That means the loan payments are going to come knocking midway through my 1L year when we won't have much disposable income.

I am considering taking out my maximum Stafford loans to cover all of my COL, and using our savings and other income to pay off these high interest loans. The effect would be shifting S.O.'s private student loan debt to lower interest government student loans. Is there any down side to this? Aside from the obvious shift in debt responsibility , I can only see advantages (IBR if necessary, much lower interest rate, and being able to further delay major payments until I am out of law school).

[jphiggo]

I've seen quite a few on here who talk about doing this. I'd just be sure that fiance is going to be staying around because that non-dischargeable Stafford loan sure will be.

[DaysToGo]

This sounds like a good idea. jphiggo is right though, make sure your fiance isn't leaving first because this will make you liable for her debt!

[Gustave]

I'm unsure about the legality of such a thing. I think your promissory note might explicitly forbid it. There's a clause in the MPN which states that you assert that the loans will be used to pay off your educational expenses that you will incur, or else repay the remaining amount immediately.
My general thinking... you might be able to reasonably call repaying the required monthly payments on the debt a "living expense," or move money around to service the minimum requirements. If you're thinking of taking out a significant amount (50k) in order to pay her private loans off quickly, it might raise eyebrows. Unsure if I'm being an overly cautious Casper, though.

[patogordo]

this is gonna be a complicated pre-nup

[rinkrat19]

You can't take out the full COA if you have a big scholarship. Your max loans are equal to COA minus other aid, like scholarships.

Not to mention that loans are only to be used for educational and living expenses, not paying off loans.

[Paul Campos]

The down side is that if you break up the debt is yours, legally speaking. If you were married when the debt was incurred this would be a no-brainer as the debt would be marital property, but as it is it remains her separate property even if you were to get married now.

Also, keep in mind that you're only eligible for federal loans to the extent that your scholarship doesn't cover the full cost of attendance. (This probably isn't a factor as even "full" law school scholarships generally don't cover COL).

[Gustave]

Also, keep in mind that you're only eligible for federal loans to the extent that your scholarship doesn't cover the full cost of attendance. (This probably isn't a factor as even "full" law school scholarships generally don't cover COL).

Right. I'm sure he could find the wiggle room in three years of attendance to borrow an extra 50k. It would just be slightly illegal, and probably would leave him exposed to all types of unlikely but very unattractive outcomes. Not the least of which is being stuck with an extra 50k in non-dischargeable debt and a "Dear John."

[wisc130]

I'm unsure about the legality of such a thing. I think your promissory note might explicitly forbid it. There's a clause in the MPN which states that you assert that the loans will be used to pay off your educational expenses that you will incur, or else repay the remaining amount immediately.
My general thinking... you might be able to reasonably call repaying the required monthly payments on the debt a "living expense," or move money around to service the minimum requirements. If you're thinking of taking out a significant amount (50k) in order to pay her private loans off quickly, it might raise eyebrows. Unsure if I'm being an overly cautious Casper, though.

Thanks for all the responses. The way I see it, the fungible properties of money allow me to technically use the loan funds for COL, and savings and fiance's income to pay off the loans. That's an interesting point though, and I'll have to be cautious.

[wisc130]

You can't take out the full COA if you have a big scholarship. Your max loans are equal to COA minus other aid, like scholarships.

Not to mention that loans are only to be used for educational and living expenses, not paying off loans.

I should have mentioned that my scholarship doesn't cover any COL, and the University's estimate is more than enough to max out my Stafford each year.

[redsox]

The way I see it, the fungible properties of money allow me to technically use the loan funds for COL, and savings and fiance's income to pay off the loans.

This.

[NYSprague]

You are going to take out (nonchargeable) loans that you will be solely responsible for to repay (dischargeable) debt you have no responsibility for?

There has to be some tax implications because she is receiving a gift of $50,000 as income to her. Isn't she? It isn't income to you, but it is to her.

Plus the MPN doesn't allow this use of funds, but that doesn't seem to bother you.

[JJ123]

It's a good idea, from an interest rate perspective. But, I'd make very sure that you are entitled to be repaid that money if she leaves. And I don't know if you could legally enforce a contract to that end, because what you're doing (using one loan to pay another) is probably illegal.

[wisc130]

There has to be some tax implications because she is receiving a gift of $50,000 as income to her. Isn't she? It isn't income to you, but it is to her.

You may be right on that. In that case I'd have to stay under the $14,000/yr gift threshold?

[NYSprague]

There has to be some tax implications because she is receiving a gift of $50,000 as income to her. Isn't she? It isn't income to you, but it is to her.

You may be right on that. In that case I'd have to stay under the $14,000/yr gift threshold?

I'm not giving you tax advice on a transaction that may not be legal. lol.

But,seriously, you are giving her money and there is a cap on how much you can give someone before that gift income is taxable. Tax wasn't my best class but I am sure that you can't just give her $50,000 to repay loans and not have that be income to her. I wouldn't try to get fancy and loan it to her at the same interest that you are borrowing it, and then defer payments on that note either. You need real advice.

[Pneumonia]

There has to be some tax implications because she is receiving a gift of $50,000 as income to her. Isn't she? It isn't income to you, but it is to her.

You may be right on that. In that case I'd have to stay under the $14,000/yr gift threshold?

I mean you're gonna be close to that anyway if you spread 50k out over 3 years. Also, your previous point seems like it would still apply.

[NYSprague]

Just so you know: the 10 year repayment plan puts $50,000 at about $570.00 a month for 10 years. The reason her interest rate is higher is because she can discharge her debt in bankruptcy if she needs to do so.

She should try to get a better deal, see what arrangements she can make with the lender. I feel you will be making a mistake to take on more debt than you need to.

How was she planning to pay this debt when she borrowed it? Does she have a career plan?
What happens if she defaults?

Don't get into the habit of looking down the road and putting off payments. Live as absolutely cheaply as you can and pay the debt without borrowing more.

[Power_of_Facing]

Potentially relevant to your chicanery:

https://www.penfed.org/Penfed-Promise/?WT.ac=1339

[Clearly]

How long you been with them?