Today is a milestone day in my financial story. I married into the mother-of-all-loans: my wife’s med school loan. It is a hefty six-figure sum that nearly caused my heart to stop when my wife first told me the amount. Since that initial shock, we really haven’t paid much off for two reasons. First, she is in an income based repayment plan where the principle does not capitalize and a chunk of the interest is subsidized. Second, because we moved to a new location for her residency and saved a chunk of money if we decided to move after she completed it.
Since then, two things have happened that gave me the green light to wage war on this gargantuan foe. First, we filed jointly for the first time last year for taxes, which made the minimum payment on the income based repayment go way up. Second, we decided to stay where we are at and my wife will start with a practice in the area next year.
So, we kicked off our war against debt by taking the money we had saved if we moved and put it all towards the loan. This got us to a place where I contemplated taking out a new loan rather than dealing with the government, who has mishandled paperwork twice and managed to let the interest accrued last year capitalize.
I turned to the most trusted bank I know of and that I enjoy doing business with: M&D Bank. Never heard of it? That’s because that is the name I coined for taking out a loan from my mom and dad (M&D). In fact, today is the day that the money is together and we are paying off the government.
Reasons that Borrowing from Parents Works for Me
Better Interest Rate
We treat the transaction the same way as if I were shopping and price-comparing for anything else. I ran the numbers based on tax credits, capitalizing interest, and what the minimum payment could be. I gave my parents a bottom line of what interest rate I was looking for to make the switch.
My Parents Benefit
The best part is that my parents get a relatively low risk return on investment. Bottom line, the agreed upon APR would be tough to beat in the stock market and has less risk, as my wife and I have a very good track record of payment. For me, I like that the interest I am paying is benefitting them and I hope they are proud that I am responsible enough to understand what I am getting into with loans and devised a sound plan for paying it back.
The Government Doesn’t Benefit
Everyone I know likes sticking it to the government as much as they can. I am very much enjoying the fact that we are limiting the interest that is going to the government. Like I mentioned, we did our research about how much we might lose in tax write-offs, but made sure that the improved APR makes up for the lost tax benefit.
What I’ve Learned from the Experience
Recognize the Unique Situation
The few folks that I told about this arrangement said that it is great and that they wished they had the same option. What they mean is their parents are not in a position to offer such a loan. In fact, a colleague of mine, who is also very money-conscious, recently told me how his dad is continually borrowing money from him and he had to set ground rules about what he can afford and how much he can give. It sure sounded like he does not expect to see that money back. This feedback makes me even more appreciative of how responsible my parents have been and that they have passed that on to me.
Learn By Example
Given that this is the only time I have dealt with a government loan and seen the ineptitude with which it is handled, I fully intend to put myself in the same situation my parents are in. I don’t plan to give my kids money but rather be available for similar loans that my parents made available to me. If both parties are responsible, it can benefit everyone involved.
Avoid the Government
Loans are bad and the government is worse. Put them together and nothing good occurs. If I can help it, I plan to avoid any money transactions with the government for the rest of my life.
Conclusion
I must admit, the strangest part of this process was seeing the confirmation that the government loan was paid off. For a few moments, I think I fooled myself into thinking that meant we were done with the loans. I will bottle that feeling as we get extra-aggressive in paying back my parents so that the only debt we have is the mortgage. It will be tough, but we are definitely up for it.
Have you had good experiences with borrowing from parents or lending to your children?
