Advice on Loans From Parents and Grandparents

Parental Loans - Advice

If you have saved over the years and even if you have only a few thousand in the bank above your living expenses, you might at some point be approached by an adult child or college aged grandchild for a loan or, what sometimes might be even more dangerous, cosigning on a loan or credit application.

Parents sometimes have little choice regarding college loans but grandparents are sometimes requested to co-sign loans by grandchildren and this might be where the line would be drawn.  Student loans are typically not even dischargeable by bankruptcy.  Here is some information and advice you could use before deciding whether to lend money or to co-sign on a loan.

  • You need to decide whether you are making a loan or giving a gift.  A loan has a realistic expectation for repayment.  If you are “lending” money to an adult child, grandchild or even a friend, you need to decide in advance and realistically whether you expect repayment and on what terms.  If you do not, you could be setting yourself up for serious disappointment.  In the 17th century, Shakespeare made the statement in Hamlet, “<n>either a borrower nor a lender be…”  In today’s terms, we might just say to think through the possibilities.

If your loan is really a gift and you can afford to give, then you might just acknowledge it as such and move on.  If you want to be repaid, then you need to think it through and provide structure.

  • If you are lending money, establish a structure how it is to be repaid.  A loan, even among family members, should be in writing with dates, amounts and manner of payment.  It should also contain an amortization schedule showing how much remains on the loan after each payment, final payment date, and provisions regarding interest.  It should be signed by the parties and at least witnessed if not notarized.  It needs to be realistic.  Where there is massive debt with no likely source of repayment in sight, a relative might do better consulting a bankruptcy attorney.

There are other means for repayment.  Sometimes parents designate that the loan is to be deducted from that child’s share of inheritance after the parent dies.  I am not a fan of the arrangement since papers can get lost, parents may change their minds later, and the repayment comes many years after the fact.  However, for some people it works.

Loans, of course, could also be from children to parents.  If the parent owns a residence with sufficient equity, one technique our office often uses is to prepare a note with a private reverse mortgage to the adult child, record it on the property and provide for payment to the adult child when the parent’s house is sold.  The same technique could be used for parents lending to an adult child who owns a property with equity.

  • You need to know the downside of co-signing on a loan.  Grandparents, especially, who are asked to co-sign a loan, especially a student loan, should think long and hard before doing so.  As stated previously, parents might have little choice for student loans.  However, we have seen multiple cases of grandparents who are asked to sign sometimes with tragic results.  Here is why.

The grandchild may be at a stage in life where he or she has not yet decided where he or she wants to go.  The grandparent, wanting to please and thinking that the child is primarily liable, might be convinced to sign.  The grandparent’s own funds might not be substantial and might be needed for his or her support.   If the child changes her mind and decides, for instance, to drop out of school, to discontinue classes, to move to another school, or to move out of her apartment before the lease has ended and discontinue payments on rent, she may feel that she no longer should be responsible for the debt.  She might also not have a job to repay it even if she wants to pay the debt.

Co-signers are equally responsible on the loan and lenders might proceed directly against the co-signer as the more responsible party.

When approaching lending, consider the alternatives and have a plan.  It can be a wise choice in the right case but it requires advance preparation and thought.

About the Author Janet Colliton

Esquire, Colliton Law Associates, P.C. Janet Colliton has practiced law for over 38 years, 37 of them in Chester County, Pennsylvania, a suburb of Philadelphia. Her practice, Colliton Law Associates, PC, is limited to elder law, Medicaid, including advice, applications and appeals, and other benefits planning including Veterans benefits, life care and special needs planning, guardianships, retirement, and estate planning and administration.

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