Would it make sense to take a loan from a relative to pay off student loans?
"My biggest concern with this plan is that there's no going back should you decide that it is not going to work, either due to the strain on the relationship or for some other reason.   If you were borrowing from a relative in place of a mortgage or a car loan, you can always refinance, and might just pay a little more interest or closing costs from a bank.  Student loans are effectively unsecured, so your only option for a ""refinance"" would be to get a personal, unsecured loan (or borrow against existing collateral if you have it). You are going to have a tough time getting another 50k unsecured personal loan at anywhere near student-loan rates.   The other negative aspects (overall risk of borrowing from family, loss of possible tax deduction) make this plan a no-go for me. (I'm NOT saying that it's always a good idea to borrow from family for homes or cars, only that there's at least an exit plan should you both decide it was a bad idea)." "Personally, I avoid making business deals with friends and relatives. There's just too much of a possibility that things can go wrong.  Let's assume that you're honest people and you have no intention of cheating your mother-in-law. Still, all sorts of things could happen that could make it difficult for you to repay the loan. You could lose your job. You could get some big medical expense. Etc. Then what happens? Then your financial problems become family problems. There's a strong temptation when people borrow from relatives to make paying the loan the lowest priority in their budget. ""I know I promised to pay \$X per month, but things are really tight right now and Mom should understand."" Maybe she does understand and can manage without it. But maybe not. And then it becomes a family fight. ""You promised you'd pay it back."" ""And we will, we're having a hard time right now. Can't you just give us a break?"" Etc. Or she might have some extra expense, and say, ""Hey, can't you pay a little more this month? I really need some extra cash."" ""I'm sorry, we're struggling just to make the regular payments, we can't."" ""Well I was willing to loan you all this money. The least you could do is pay me back when I need it."" Etc. You can end up ruining family relationships over money. Your wife can find herself in the position of having to choose whether to side with her mother or her husband. Etc. I'm sure plenty of people do things like this and it works out just great. But there are big risks. And by the way, apparently this was your idea, not your mother-in-laws. I wonder what her reaction is. Is she eager to help out her daughter and son-in-law and had nothing in particular to do with the money anyway? Or is she feeling very imposed on? It's one thing to ask relatives to let you borrow their car for the weekend. Asking someone to loan you $50,000 is a very big request. If one of my kids asked me to loan them $50,000 from my retirement fund, I'd consider that a very presumptuous request. (Unless they needed the money for life-saving surgery for my grandchild or some such.)" I struggle to see the value to this risk from the standpoint of your mother-in-law.  This is not a small amount of money for a single person to lend to a single person ignoring your personal relationship.   Right now, using a blended rate of about 8% and a 5 year payment period, your cost on that $50,000 is somewhere in the neighborhood of $11,000 with a monthly payment around $1,014. Using the same monthly payment but paying your MIL at 5% you'll complete the loan about 3.5 months sooner and save about $5,000, she will make about $6,000 in interest over 5 years against a $50,000 outlay. Alternatively, you can just prioritize payments to the more expensive loans.  It's difficult to work out a total cost comparison without your expected payoff timelines and amount(s) you're currently paying toward all the loans.  I'm sure a couple hours with a couple of spreadsheets could yield a plan that would net you a savings substantially close to the $5,000 you'd save by risking your mother in law's money. A lot of people think personal lending risk is about the relationship between the people involved, but there's more to it than that. It's not about you and your wife separating, it's not about the awkward dinner and conversations if you lose your job.  Something might physically happen to you, you could become disabled or die.  Right now, that's an extremely diversified and calculated risk taken by a gigantic lender. Unless your mother in law is very wealthy, this is not nearly enough reward to assume this sort of risk (in my opinion).  Her risk FAR outpaces your potential five year savings. IF you wanted to pursue this as a means of paying interest to a family member rather than the bank, I'd only borrow an amount I budgeted and intended to pay within this single year.  Say $10,000 against the highest interest loan. I will start with the assumption that you will never have any late payments and will fully pay off the loan. This may be a big assumption, but if you can't assume that, then you wouldn't have asked the question in the first place. The answer depends on your income: You should calculate how much student loan interest you can deduct before and after the switch, and adjust the interest rate accordingly to compensate for any difference. I have recently been the lender to a couple people. It was substantially less money (~$3k), but I was trusting their good faith to pay me back. As a lender, I will never do it again. Reasons, Overall, not worth it. "Would it make sense to take a loan from a relative... Other people have pointed this out, but honestly, I'd be very reluctant to answer ""yes"" to this no matter how you completed that sentence. There's always an intangible risk to mixing money and relationships. There's a lot that can go wrong during the duration of the loan, and if it does, the consequences could be a lot greater than just a bad credit score." The interest that you are proposing to pay your MIL is actually quite low compared to even extremely conservative investing which easily earns 7% or more with quantifiable low risk. You claim that it would be no risk, but what would happen if you lost your job? The risk she faces is more or less exactly what a bank would experience while giving the loan, or in other words it is pretty much whatever your credit score says. Even worse, she does not have a large pool of investments to distribute this risk like a bank would. Making loans this large in a family situation is a recipe for disaster. Taking a huge risk with the relationship your wife has with her mother over three points of interest is exceptionally unwise. Are these private or federal student loans? Federal student loan debt is some of the safest to carry due to its income based repayment plans and eventual loan forgiveness after 25 years. Have you investigated income based repayment options?
Every time I have loaned money to family members I have never gotten the money back. If they can't make the down payment, they should not be taking out the loan. It's a bad idea to loan money to friends, because when they can't pay you back (which might be forever) they avoid you. So, you lose both your money and your friends. "Consider the ""opportunity cost"" of the extra repayment on a 15 year loan.  If you owe money at 30% p.a. and money at 4% p.a. then it is a no brainer that the 30% loan gets paid down first. Consider too that if the mortgage is not tax deductable and you pay income tax, that you do not pay tax on money you ""save"". (i.e. in the extreme $1 saved is $2 earned). Forward thinking is key, if you are paying for someone's college now, then you would want to pay out of an education plan for which contributions are tax deductable, money in, money out. In my country most mortgages, be they 15,25,30 years tend to last 6-8 years for the lender. People move or flip or re-finance.  I would take the 15 for the interest rate but only if I could sustain the payments without hardship. Maybe a more modest home ?   If you cannot afford the higher repayments you are probably sailing a bit close to the wind anyway.   Another thing to consider is that tax benefits can be altered with the stroke of a pen, but you may still have to meet repayments." "I really don't feel co-signing this loan is in the best interests of either of us.  Lets talk about the amount of money you need and perhaps I can assist you in another way. I would be honest and tell them it isn't a good deal for anybody, especially not me.  I would then offer an alternative ""loan"" of some amount of money to help them get financing on their own.  The key here is the ""loan"" I offer is really a gift and should it ever be returned I would be floored and overjoyed.  I wouldn't give more than I can afford to not have. Part of why I'd be honest to spread the good word about responsible money handling.  Co-signed loans (and many loans themselves) probably aren't good financial policy if not a life & death or emergency situation.  If they get mad at me it won't matter too much because they are family and that won't change." My in-laws are pressuring me to buy a home.  I don't really have much financial experience. In fact, I'm a nightmare with finances. I almost have my student loans payed off from school.  My in-laws and husband are great with finances and with real-estate.  My husband has a good job and $200k in savings.  I have a good job too, and still have some debt from school. (approx $60k left of 180k).   They say the house will be available in Jan or February for purchase, and that we should really try to buy it (prob $2-3 mil).   My guess is they want to make it available to us off the market (which is a huge benefit in this area,  there are really no houses available lately) .   The problem is:  I am uncomfortable because I don't have all of my loans payed off,  I could divert money away from paying off the loans in order to save for a larger downpayment. I just got a bonus of $35k (after taxes)   I don't think I'll have all of my loans payed off by January. Should I save my money for the downpayment or focus on my loans, should I go for the house?  I don't know how to weigh these options against each other with such little experience. Timo's concern may be accurate, but talking to the bank is the next step.  If I am the banker, I'm happier that (a) there's 25% down, and (b) it's not an additional loan as some might get from a parent.  It's not that your parents have a lien for the 25% as a lender would, the structure is ownership, they own 25%. An important, if not obvious, distinction.  Timo is right that as an asset of the parents, the ownership stake is at risk if their finances run into issues. Other than that, so long as all is done above board, your proposal can work. The bank will want your parents to sign the note of course, you can't mortgage property you don't fully own. "You should pay for grad school without taking loans if your circumstances permit. There is the possibility of a tax write off for interest paid on student loans, but it's slightly complicated and it's very much a ""give me $10, and I'll give you $5 back"" kind of deal. You're better off not borrowing the money to begin with, even though I tend to think that borrowing for things which appreciate-- e.g., a house-- or which can significantly increase your earning capability-- e.g., the right kind of graduate school-- is generally better/wiser/more permissible than borrowing for something which depreciates, like a car. Having no student loan debt after graduation means you have greater freedom than someone who is laboring to pay student loan debt in addition to all of their other bills. My $0.02" If this isn't a case where you would be willing to forgive the debt if they can't pay, it's a business transaction, not a friend transaction. Establish exactly what the interest rate will be, what the term of the loan is, whether periodic payments are required, how much is covered by those payments vs. being due at the end of the term as a balloon payment, whether they can make additional payments to reduce the principal early... Get it all in writing and signed by all concerned before any money changes hands. Consider having a lawyer review the language before signing. If the loan is large enough that it might incur gift taxes, then you may want to go the extra distance to make it a real, properly documented, intra-family loan. To do this you must charge (of at least pay taxes on) at least a certain minimal interest rate, and they have to make regular payments (or you can gift them the payments but you still won't up paying tax on the interest income). In this case you definitely want a lawyer to draw up the papers, I think. There are services on the web Antioch specialize in helping to set this up properly, and which offer services such as bookkeeping and monthly billing (aT extra cost) to make it less hassle for the lender. If the loan will be structured as a mortgage on the borrower's house -- making the interest deductible for the borrower in the US -- there are additional forms that need to be filled. The services can help with that too, for appropriate fees. Again, this probably wants experts writing the agreement, to make sure it's properly written for where you and the borrower live. Caveat: all the above is assuming USA. Rules may be very different elsewhere. I've done a formal intractability mortgage -- mostly to avoid gift tax -- and it wasn't too awful a hassle. Your mileage will vary. "Let's summarize your relative's problem: How is this possible? If both of those statements are true, then he should be able to explain exactly why those statements are true, and then you can explain it to us, and then we can all nod our heads and admit, ""Wow, that makes sense. Proceed if you want to."" But until that happens I suggest you take the advice I offered in the first paragraph of this answer." "It's viable for you,  but the ""investor"" is either stupid or willing and able to write off the investment as a gift for a friend in need, knowing it will probably end the friendship.  The banks make their money off of indebtedness, with the highest returns being on the highest risk loans . If the bank isn't willing to give you that debt on your own,  it's because they already know it's a bad debt. In this case,  trust the banks. If you can't come up with the downpayment on your own, you won't be able to meet your other commitments on this contract." "My thoughts on loaning money to friends or family are outlined pretty extensively here, but cosigning on a loan is a different matter.  It is almost never a good idea to do this (I say ""almost"" only because I dislike absolutes).  Here are the reasons why: Now, all that said, if my sister or parents were dying of cancer and cosigning a loan was the only way to cure them, I might consider cosigning on a loan with them, if that was the only option.  But, I would bet that 99.9% of such cases are not so dire, and your would-be co-borrower will survive with out the co-signing." Only if (or to put it even more bluntly, when) they default. If your friend / brother / daughter / whoever needs a cosigner on a loan, it means that people whose job it is to figure out whether or not that loan is a good idea have decided that it isn't.  By co-signing, you're saying that you think you know better than the professionals. If / when the borrower defaults, the lender won't pursue them for the loan if you can pay it.  You're just as responsible for the loan payments as the original borrower, and given that you were a useful co-signer, probably much more likely to be able to come up with the money.  The lender has no reason to go after the original borrower, and won't.  If you can't pay, the lender comes after both of you. To put it another way:  Don't think of cosigning as helping them get a loan.  Think of it as taking out a loan and re-loaning it to them. "In some cases, it might be rational to pay low-interest debt first, because the consequences of defaulting on that debt are worse.   Consider this simplified example.  Suppose you have two debts: a low-interest mortgage, secured by your house, and a high-interest unsecured credit card debt, both of which are within a few years of being paid off.  There is a chance that sometime between now and then, something will happen to disrupt your income (e.g. medical problems), and it won't be possible to make the payments on either loan.   Defaulting on the credit card loan will result in a lower credit score and calls from collection agencies.  Defaulting on the mortgage will result in the foreclosure or forced sale of your house, at best forcing you to move, and at worst leaving you homeless, at a time when you are also facing other (e.g. medical) problems.  So you might rationally judge that losing your house is much worse than bad credit.  Therefore, you might rationally conclude that it would be better to direct extra income toward paying down the mortgage, to increase the chances that, if and when an income disruption might occur, the mortgage would already be paid off.  In other words, you shorten the window of time where income disruption results in foreclosure. You might decide that this increased security is worth the extra interest you will pay, compared to the strategy where you pay the high-interest loan first. This is a fairly special situation, but you asked ""Why might it be a good idea to do this?"", and I am just giving an example where it could rationally be considered a good idea.   (Of course, in a real-life version of this example, there might be other options available, such as refinancing the mortgage.  If you like, you could imagine a more extreme example where the lower-interest debt is owed to Joey Knuckles the loanshark, who will come and break your kneecaps if you miss a payment.)" All of RonJohn's reasons to say no are extremely valid. There are also two more. First, the cost of a mortgage is not the only cost of owning a house. You have to pay taxes, utilities, repairs, maintenence, insurance. Those are almost always hundreds of dollars a month, and an unlucky break like a leaking roof can land you with a bill for many thousands of dollars. Second owning a house is a long term thing. If you find you have to sell in a year or two, the cost of making the sale can be many thousands of dollars, and wipe out all the 'savings' you made from owning rather than renting. I would suggest a different approach, although it depends very much on your circumstances and doesn't apply to everybody. If there is someone you know who has money to spare and is concerned for your welfare (your mention of a family that doesn't want you to work for 'academic reason' leads me to believe that might be the case) see if they are prepared to buy a house and rent it to you. I've known families do that when their children became students. This isn't necessarily charity. If rents are high compared to house prices, owning a house and renting it out can be very profitable, and half the battle with renting a house is finding a tenant who will pay rent and not damage the house. Presumably you would qualify. You could also find fellow-students who you know to share the rent cost. "Let me run some simplistic numbers, ignoring inflation. You have the opportunity to borrow up to 51K. What matters (and varies) is your postgraduation salary. Case 1 - you make 22K after graduation. You pay back 90 a year for 30 years, paying off at most 2700 of the loan. In this case, whether you borrow 2,800 or 28,000 makes no difference to the paying-off. You would do best to borrow as much as you possibly can, treating it as a grant. Case 2 - you make 100K after graduation. You pay back over 7K a year. If you borrowed the full 51, after 7 or 8 years it would be paid off (yeah, yeah, inflation, interest, but maybe that might make it 9 years.) In this case, the more you borrow the more you have to pay back, but you can easily pay it back, so you don't care. Invest your sponsorships and savings into something long term since you know you won't be needing to draw on them. Case 3 - you make 30K after graduation. Here, the payments you have to make actually impact how much disposable income you have. You pay back 810 a year, and over 30 years that's about 25K of principal. It will be less if you account for some (even most) of the payment going to interest, not principal. Anything you borrow above 25K (or the lower, more accurate amount) is ""free"". If you borrow substantially less than that (by using your sponsorship, savings, and summer job) you may be able to stop paying sooner than 30 years. But even if you borrow only 12K (or half the more accurate number), it will still be 15 years of payments. Running slightly more realistic versions of these calculations where your salary goes up, and you take interest into account, I think you will discover, for each possible salary path, a number that represents how much of your loan is really loan: everything above that is actually a grant you do not pay back. The less you are likely to make, the more of it is really grant. On top of that, it seems to me that no matter the loan/grant ratio,  ""borrow as much as you can from this rather bizarre source"" appears to be the correct answer. In the cases where it's all loan, you have a lot of income and don't care much about this loan payment. Borrowing the whole 51K lets you invest all the money you get while you're a student, and you can use the returns on those investments to make the loan payments." Paying off your student loan is an investment, and a completely risk-free one.  Every payment of your loan is a purchase of debt at the interest rate of the loan.   It would be extremely unusual to be able to find a CD, bond or other low-risk play at a better rate.  Any investment in a risky asset such as stocks is just leveraging up your personal balance sheet, which is strictly a personal decision based on your risk appetite, but would nearly universally be regarded as a mistake by a financial advisor.  (The only exception I can think of here would be taking out a home mortgage, and even that would be debatable.) Unless your loan interest rate is in the range of corporate or government bonds -- and I'm sure it isn't -- don't think twice about paying them off with any free cash you have.