Formal student loans from parents: a win-win for families

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By Nicholas A. Domino

Student loans. The very mention of those two words sends tremors of fear and anxiety to students and parents alike.

Why? Because there are countless stories out there about their onerous burdens often lasting lifetimes, and the primary options for getting student loans are all troublesome in one way or another.

Nick Domino
Nicholas Domino

A typical example is that of a young woman, Lisa McCarrick, a client of ours, who was close to being free from the weight of the high-interest rates on loans that funded her undergraduate education. That is, if she ignored the fact that she just got into her top-seeded MBA program and was about to quintuple her debt.

She came to me with a problem: “How am I going to pay for my education?” We identified three options.

1. The most likely and dreaded was taking out further student loans, which she hesitated to do,  being familiar with the irrationally high interest rates.

2. Asking her parents for a handout — the only option worse than taking another Stafford loan. However, that jeopardized something even more coveted than her balance sheet — her pride.

3. With her good credit, she could get a private loan from a bank at around 6 percent, lower than the student loans, but ineligible for education forbearance.

Yes, in many cases it’s tempting to take option 2. But, pride aside, what if she could make that work by coming up with an approach that could also help her parents financially?

To start, it was pivotal to understand that an unstructured interest-free handout from her parents was out of the question, and Lisa far preferred a formalized private loan with a repayment schedule with her family. By doing so, she would be able to cut out the middle man. Instead of paying the bank or government the interest, she could succeed in not only paying a lower interest rate than she would have with a bank or federal loan and the benefactor receiving loan interest payments would be someone she loves.

So how did she go about this? As a start, we helped her estimate her parent’s risk tolerance and then decided that offering a guaranteed rate of 4 percent would be more competitive than any bond or certificate of deposit they might have the money invested in.

Following that, one of her lawyer friends drew up the documents to be notarized. In addition, any DIY-crazed millennial can also find their own promissory note templates online at sites such as Nolo or Law Depot.

Finally, she pitched her parents on the idea, which can be the most intimidating part. But because she came fully prepared for this conversation with both the formal benefactor loan agreement and payment schedule structure, her parents fully understood that her heart and her plan were in the right place and they readily agreed.

As a result, she paid neither dreadfully high interest rates nor lost her pride. Instead she demonstrated maturity and fiscal responsibility to her parents, while delivering a new asset to their balance sheet.

That young woman is now happily enrolled in that top-seeded MBA program, with the freedom of mind allowing her to concentrate on her studies.

Even better, this is a true story.

Nicholas A. Domino is primary financial adviser for millennial clients at Associated Benefit Consultants LLC in Rye Brook. He can be reached at 914-288-8805. 

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