Dear Liz: My husband and I have saved close to $2 million. He is 58, and I am 59. Our son is a hardworking, bright young man awaiting responses to medical school applications. My husband wants to loan him $200,000 to $500,000 to reduce his debt from interest on loans. I want to help too, but I think $200,000 should be the limit.
I want a legal contract to determine when it will be paid back, how much interest we will charge, and so on. My concern is that we are unsure how to set this up and I don’t want a nice gesture to end up causing problems with our son down the road. My husband is still working and has a nominal pension from military retirement.
Answer: The first rule of friends-and-family loans is to offer only what you can afford to lose. Even with all the proper documents, many loans turn into inadvertent gifts when the borrower can’t or won’t make the payments.
So your first stop should be a fee-only financial planner, who can review your entire financial situation, including your retirement plans, and let you know how much you can afford to lend your son.
The exact amount will depend on when your husband plans to stop working, how much you anticipate spending and how much you expect to receive from the pension and from Social Security, among other issues.
The planner also can tell you what interest rate you’ll need to charge to avoid having to file gift tax returns with the IRS.
Once you have that information, you and your husband can work together to determine the size of the loan and the interest rate. You can find promissory note templates online, or you can hire an attorney to draft the actual agreement.
I copied your column from the Oregonian yesterday about SocSec ex-spousal benefits for my partner. In it you state that a benefit may be applied for based on a divorced spouse’s benefit as long as both are at least age 62. However, when I visited the SocSec website it stated application can be made at 62, but the one-half benefit is not applicable unless both are at least age 65. You state: It doesn’t matter if he starts early or late: that doesn’t affect what you as his ex would receive.” The website is: https://www.ssa.gov/planners/retire/divspouse.html
From Liz: Thanks for the note! You’re quite right, and I’ll be correcting this in an upcoming column.
The information you received is incorrect, which unfortunately isn’t unusual for Social Security. The benefit would be reduced if your partner started it before full retirement age, but is not increased or decreased based on when her ex starts. Your partner can point the Social Security rep to this page on the site: https://www.ssa.gov/planners/retire/divspouse.html
I just wanted to share a little info regarding the letter from the parents contemplating loaning their son money for medical school. Before doing so they should carefully research and understand the various medical school loan forgiveness programs, in particular the Public Service Loan Forgiveness Program which requires 10 years of service in a public/non-profit setting and 10 years of loan re-payment. By the time a doctor has completed their training (residency and possibly fellowship), if done in a public/non-profit setting (most teaching hospitals), they may have completed, or will be very close to completing their 10 years of service and payments to qualify for loan forgiveness. And, because their income is SO LOW during training, their loan payments are also very low. So, borrowing from parents could leave the son with lots of unforgiven debt outstanding. During the course of this arduous journey to becoming a doctor, there is plenty of opportunity for parents to help their son financially. Like when he has to fly all over the country to interview for residency, or while he is trying to survive on less than $60K a year for 3, 4, 5+ years of residency in some big city. However, qualifying and maintaining qualifications for the loan forgiveness programs requires incredible attention to detail, rules and regulations during the entire course of the program, so beware!
Thanks for adding this perspective!