Borrowing Money From Family for College
Shakespeare is famous for his quote “Neither a borrower nor a lender be” when it comes to sharing money amongst friends and family. But for families in a crunch when it comes to college costs, borrowing from family members might be one of the few options available at a reasonable cost. How can you borrow from family and close friends without worrying about awkward Thanksgiving dinners if things don’t go well?
Make Informed Investments
Whether you’re the investor or the borrower, understanding the basic nature of the borrowing relationship is key. The investor has to have confidence that the borrower will be able to repay the loan, which means having a certain amount of confidence in the student, his/her line of study, as well as future employment opportunities. For the student, this means making smart choices about what college is best, and what program to study, as well as being informed on the employment market, and being prepared to answer questions from the lender on those fronts.
Be Clear On Terms
Miscommunication can be the death of a good relationship; doubly true if money is involved. Before borrowing or lending, make sure that the terms of the arrangement are clearly spelled out in writing and agreed to by both sides. The lender may offer to reduce or waive interest during the study period, while the borrower may request the option of paying back some of the loan during the college years, based on summer employment income. Both sides should agree to an interest rate beforehand (even if it’s variable), and plan for contingencies such as if the student needs to drop out due to illness or emergency, if the student doesn’t graduate, or if the student fails to get a job quickly after graduation.
Agree on Boundaries
Borrowing money from family is truly a case of mixing business with pleasure; pleasure which turns out to be a nightmare when things go wrong. In the age of Facebook, students can feel that family members are scrutinizing their every move, and it can be hard for family members to refrain from commenting “Shouldn’t you be studying?” after every social college outing. Agree on boundaries such as the student sharing end of year grades if the lender doesn’t nose around with family members to find out how the school year is going.
Borrowing from family can be a great way to solve a college financing problem; family can enjoy supporting the next generation of relatives, while students can benefit from better terms than from traditional lenders like banks and financial aid programs.
