Family Loans: The New Way to Pay for Tuition?

Alexa Pugh
Posted

Family student loanInstead of asking your family for another sweater for your birthday, how about a low-interest student loan?

Family loan pools—trust funds from which relatives going to school can draw low-interest loans—have become an increasingly popular way for people to help their kin ease the cost of education, Reuters reports.

Unlike family banks, which can make certain investments and give grants, family loan pools are set up specifically for supporting education. For tax reasons, lawyers recommend charging interest at the applicable federal rate—around 1.2% for 3- to 9-year loans—but rates afforded by family loan pools can be significantly lower than those for private or even federal options.

On July 1st, the government doubled the interest rate on subsidized student loans to 6.8%.

The funds start with several thousand dollars in seed money, and then take contributions from relatives to grow the pool. Trustees from the family are appointed to select loan recipients, who can later donate money to the fund once they’ve repaid their debt and have the means to help support a new generation of students.

A fund started 50 years ago by the family of Illinois lawyer George Lewis has cultivated $111,000, which now gets lent out to college-bound relatives at no interest.

But families should also take care to outline policies for taking out a loan as to avoid future debate—arguments over repayment or defaulting on a loan could cast a serious cloud over the next family reunion.

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