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Education loans from the Bank of Mom and Dad

[May 27, 2011.]


More graduate business students are getting personal loans from Mom and Dad to help pay for their education. A 2011 survey by the Graduate Management Admission Council found that nearly 40 percent of prospective students polled said they expected their parents to help pay for business school, according a Providence Business Journal article.

Parental loans may be safer

"Any time there is economic uncertainty like there is now, there is a general reluctance to borrow," Haley Chitty, a spokesman for the National Association of Student Financial Aid Administrators, told the Providence Business Journal. "Borrowing from Mom and Dad is going to seem a lot safer than borrowing from the government and taking on a loan which likely can't be discharged in bankruptcy and can follow you for the rest of your life."

Setting up personal loan agreements

So how should families structure a loan to make sure nobody gets burned? It is important to set up a formal loan agreement that spells out all the terms and conditions. If you are unsure how to do this, peer-to-peer (P2P) Web sites like LendFriend and LendingKarma can help you set up an agreement. Include the following items to make sure everyone is on the same page:

  • How much money is being borrowed and at what interest rate?

  • What are the payments going to be and what day of the month are they due?

  • When should the loan be repaid in full?

  • Will there be any contingencies for extending the time table for repayment?

Can you afford to lend money?

It is not uncommon for parents to want to help their kids get a higher education. But not all parents are in a financial position to lend money to their kids. If you don't have the funds to help your kid attend grad school, do not go into debt to help them. While it may be tempting to borrow money from your retirement account or tap credit cards, this is a bad idea and is likely to push you deep into debt and make it tougher to save enough for your golden years.

An alternative that some parents agree to is to co-sign for private student loans to help their kids go to grad school. Think long and hard about doing this. If your student defaults on a loan, you are going to be responsible for repaying it in full, and your personal finances, as well as your relationship with your child, may suffer.


About Author:

Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.

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