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 might be requested to co-sign loans by grandchildren and this could be where the line is 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.
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.
The grandchild may be at a stage in life where he or she has not yet decided what he or she wants to do.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 own 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 rental payments, 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 alternatives and have a plan. If it is really a loan, structure it as a loan and make it official. If it is a gift be certain that it is something you can afford.
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.