Undoubtedly, the cost of higher education is extraordinary. On average, students graduate with over $31,000 in debt. The average student loan payment for the Class of 2021 was an astounding $391 per month, according to Education Data Initiative. With these realities, it makes sense to look for alternative ways to pay for education.
First, we’ll start with the premise that while attending college is expensive, it is critically important. According to the Association of Public & Land-Grant Universities (APLU), the median income for individuals aged 22-27 holding a bachelor’s degree was $52,000, compared to $30,000 for high school graduates the same age. Other benefits of a college education include being 47% more likely to have health insurance through your job and a longer life expectancy. Nearly every job requires at least some postsecondary education, as well.
So, considering how important it is to get a college degree and how much you would probably like to avoid graduating with insurmountable amounts of debt, turning to a willing relative for financial aid may not be such a bad idea. Let’s examine the likely scenarios and what you should do before accepting assistance.
Do Your Research
Before you start asking for help, do your research. Find out exactly how much your tuition will cost, factoring in any financial aid you will receive, such as grants and scholarships. Many students overlook smaller scholarships that can add up to significant college savings. Exhaust these resources first; after all, this is free money that usually does not require any form of payback.
Once you have a final number, you can decide how to move forward. If a relative has already offered, begin with a frank conversation with all involved parties. Any time there is money involved, transparency is imperative. Think about the relationship between you and the person and any conditions they might put on the money.
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Set Clear Boundaries
Our experts agree that accepting financial aid from relatives can be a smart decision. As Matas Jakutis, an investor and CMO of Forcefield Digital, put it, “Education is one investment that can always be justified.”
He does caution, however, that taking money from a family member can change a relationship. He recommends following a “no-strings-attached kind of arrangement,” further suggesting that the person lending the funds should not be able to “persuade or guilt the recipient into following a certain path in their studies.”
Matt Gray, founder of AnthroFi Wealth, agrees that borrowing money for educational purposes is a good idea if it truly helps you. He notes that relatives “can pay tuition to the school directly on your behalf and avoid gift tax implications.” He says that students should consider how borrowing may impact the relationship, cautioning against “borrowing if there are social conditions built into the loan,” such as mandatory family obligations.
Get It in Writing
If you decide to borrow from a relative, just make sure you understand the terms and conditions of the agreement. It is always a good idea to get any financial deal in writing. When you sit down with your generous relative, ensure the expectations are laid out in plain, concise language. Write out the repayment terms. Do you start repaying after you graduate or once you find a job? Or is there no expectation of repayment, but are there other conditions like majoring in a particular field or not taking time off?
Also, ask if there are any requirements about how the money is to be used. Are they paying it directly to the institution? Is it placed in a 529 College Savings Plan? Does it have to be used on tuition, or can it be applied to room and board, books or other expenses?
Gray recommends meeting with a financial planner if the intention is to make it a loan, as opposed to a gift, since “Applicable federal rates apply to the interest that must be charged” on a loan. Additionally, he states that insisting on a written agreement is important since “drafting the agreement makes sure both parties are thinking about the terms.” It also eliminates misunderstandings and controversies. An honest conversation followed up with a written contract can go a long way in avoiding uncomfortable family gatherings.
Before You Accept
Accepting financial aid from a relative for educational purposes can pay off exponentially, mainly if it makes the difference between attending a better school or not graduating with tens of thousands of dollars in student loans. Just be certain that you have a clear understanding of what the other party expects — and that they aren’t trying to use it as leverage to manipulate your future.
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