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Interesting Loan Situation
Started by triplehog22
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deleted480308
my first advice is don't borrow from family, even if the terms are better
my second advice would be to pay it back at a much more aggressive schedule than he is requiring
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deleted480308
I've seen many families that thought they liked each other more than money torn apart by much smaller amounts. My second piece of advice is because it is never good to owe people longer than you have to.....debt is a chain.
I also wouldn't, but terms-wise, it's a pretty good deal
The terms sound good. If you do go ahead with this then make sure the two of you write up and sign a contract with one another. But that is an aweful lot of money to borrow from family...
I also agree to pay it back as aggressively as possible--why would you make interest only-payments after residency? I could understanding doing that during residency, but after residency you'll make more than enough to pay it down as quick as possible. Considering that your uncle is really on the hook here (what happens if you are disabled/die?--there should be a contingency for that) I think it would be best to pay him back ASAP. If they were federal loans at 2% I'd say take your time, but I don't think you should ever leave a family member on the hook for that long, especially when the balance is so large.
The benefit of federal loans is flexible loan repayment (IBR, and at least as of right now, loan forgiveness), the loans are discharged if you die (not the case if you uncle loans you the money), etc. The benefit of the loan you're talking about is the interest rate is far lower (that will save you a ton of money), and if the balance isn't due until 2032, you also have some flexibility.
One thing you need to keep in mind is the gift tax--both ways. Unless your uncle is paying the bills himself (including your living expenses), you'll have a gift tax involved. I think the limit is ~$15,000/year, after which he pays Uncle Sam tax on what he gives you. And it works again when you start repaying him--you'll get taxed on anything above the limit (one way to partially get around it is by giving the maximum and your spouse also giving the maximum, thereby doubling the threshold before taxes kick in). Remember, the gift-giver is responsible for the tax.
I'm assuming here that your loan wouldn't be official (ie, through a bank, credit union, etc), and would likely be considered a gift. If that's the case, unless you have a way to work around those taxes (and maybe there is if it's documented as a personal loan--it's just not familiar territory to me), I would think financially the two of you will be worse off than if you took out federal loans. I don't know much about tax law, but if there is any doubt over whether the loan (and repayment) would count as gifts, this is a prime case of where talking to a tax lawyer would go a long way--first how you uncle can give you the money without any of it getting taxed, and then how you can repay him over 10 years without getting taxed as well). Remember, even if you're pretty sure everything is kosher, if you're wrong and get audited then the two of you will owe a lot of back taxes plus penalties. So I'd recommend talking to a tax lawyer regardless, unless you uncle already knows all the legal mumbo-jumbo for this sort of thing (sounds like he already gives loans, so maybe he does).
I had a sort of similar situation, where my dad paid off part of my loan balance to consolidate it into a much lower interest rate through his mortgage. But, he was a cosigner on the loan (private loan from post-bac), so he was able to pay it off without it being considered a gift to me. Because he's family, I'll be paying him back first--the agreement was I pay him everything it's costing him (he has to pay interest on the loan) plus the remaining balance of the loan. He's not making anything off it, and he's not losing anything off it. Even though the rate is much lower than my federal loans, like I said--it'll be the first loan I pay off when I finish residency. And I will need to pay it over two years so there's no gift tax taken out.
I also agree to pay it back as aggressively as possible--why would you make interest only-payments after residency? I could understanding doing that during residency, but after residency you'll make more than enough to pay it down as quick as possible. Considering that your uncle is really on the hook here (what happens if you are disabled/die?--there should be a contingency for that) I think it would be best to pay him back ASAP. If they were federal loans at 2% I'd say take your time, but I don't think you should ever leave a family member on the hook for that long, especially when the balance is so large.
The benefit of federal loans is flexible loan repayment (IBR, and at least as of right now, loan forgiveness), the loans are discharged if you die (not the case if you uncle loans you the money), etc. The benefit of the loan you're talking about is the interest rate is far lower (that will save you a ton of money), and if the balance isn't due until 2032, you also have some flexibility.
One thing you need to keep in mind is the gift tax--both ways. Unless your uncle is paying the bills himself (including your living expenses), you'll have a gift tax involved. I think the limit is ~$15,000/year, after which he pays Uncle Sam tax on what he gives you. And it works again when you start repaying him--you'll get taxed on anything above the limit (one way to partially get around it is by giving the maximum and your spouse also giving the maximum, thereby doubling the threshold before taxes kick in). Remember, the gift-giver is responsible for the tax.
I'm assuming here that your loan wouldn't be official (ie, through a bank, credit union, etc), and would likely be considered a gift. If that's the case, unless you have a way to work around those taxes (and maybe there is if it's documented as a personal loan--it's just not familiar territory to me), I would think financially the two of you will be worse off than if you took out federal loans. I don't know much about tax law, but if there is any doubt over whether the loan (and repayment) would count as gifts, this is a prime case of where talking to a tax lawyer would go a long way--first how you uncle can give you the money without any of it getting taxed, and then how you can repay him over 10 years without getting taxed as well). Remember, even if you're pretty sure everything is kosher, if you're wrong and get audited then the two of you will owe a lot of back taxes plus penalties. So I'd recommend talking to a tax lawyer regardless, unless you uncle already knows all the legal mumbo-jumbo for this sort of thing (sounds like he already gives loans, so maybe he does).
I had a sort of similar situation, where my dad paid off part of my loan balance to consolidate it into a much lower interest rate through his mortgage. But, he was a cosigner on the loan (private loan from post-bac), so he was able to pay it off without it being considered a gift to me. Because he's family, I'll be paying him back first--the agreement was I pay him everything it's costing him (he has to pay interest on the loan) plus the remaining balance of the loan. He's not making anything off it, and he's not losing anything off it. Even though the rate is much lower than my federal loans, like I said--it'll be the first loan I pay off when I finish residency. And I will need to pay it over two years so there's no gift tax taken out.
I don't really understand what you are asking, but I think what you are saying is what should you do with the extra money you have during the first 10 yrs post residency? Are you asking about savings versus investments, or saving versus spending?
A legitimate loan would not be subject to gift tax, but to be legitimate the interest rate needs to be at least a certain amount or the interest that you should have charged would be considered a gift (but unless it exceeds a certain amount it wouldn't be taxed anyway). The repayment would not be taxed, and evidently if you set up the promissory note as a student loan you may still be able to take the student loan interest deduction. This article had some good info on it.
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With a ten year time horizon before the required balloon payment, that's a short amount of time. Investing is a lot of measuring risk vs reward, and in your case the reward is you might make a few thousand extra (five figure range) but the risk is that the market will tank and you lose 40-50% of your investment six months before your balloon is due. The risk here just isn't worth the reward.
When your horizon is five years or less, you should be investing in cash equivalents or bonds with ultra-short maturities like 6 months. The interest you would gain on such investments would be negligible.
If you want to invest, do that with your own money, not the money you are temporarily borrowing from your rich uncle.
You have far more to gain by paying your uncle off regularly (or even ahead of schedule if you desire) because you will be learning responsible money management and gaining the goodwill of your uncle.
In addition to the excellent advice you've been given so far, remember that federal student loans also come with built-in disability insurance, so I would strongly suggest getting disability insurance in addition to the aforementioned life insurance.
When your horizon is five years or less, you should be investing in cash equivalents or bonds with ultra-short maturities like 6 months. The interest you would gain on such investments would be negligible.
If you want to invest, do that with your own money, not the money you are temporarily borrowing from your rich uncle.
You have far more to gain by paying your uncle off regularly (or even ahead of schedule if you desire) because you will be learning responsible money management and gaining the goodwill of your uncle.
In addition to the excellent advice you've been given so far, remember that federal student loans also come with built-in disability insurance, so I would strongly suggest getting disability insurance in addition to the aforementioned life insurance.
With as many physician clients as I have and 100% I would imagine would say that post residency loan payments are like bondage, get rid of that as fast as you can so that 1 you don't have the out bound cash flow and 2 you are not looking at a huge balloon payment 10 years down the road....those dates always arrive quicker than you think and the money you were to diligently put away sometimes finds other places to go!
It's your Uncle. Pay him back ASAP and thank him profusely for the 2%. That money can do other things for him and for others in your family if you pay it back ASAP.
Appreciate all the responses. Just wanted to get a feel for what others thought was the most prudent course of action, which looks to be to pay him back as fast as possible.
Consider taking out federal student loans. That way even though the interest rate is higher, you will be eligible for the 10 year forgiveness if you wind up in a field that reimburses poorly enough to be in IBR post-residency: e.g. family medicine, peds, primary care. If you get an off the books loan from an uncle, then you will not be eligible for this type of repayment/forgiveness.
If you go the uncle loan route, I would make regular payments over the 10 years so that you are not facing a large balloon payment at the end. If you are able to do that, then a 2% interest rate is excellent given the current student loan rates. Though, if you take federal loans and go into a better-compensated specialty and don't qualify for IBR, you can elect to go the 30 year repayment route... good for those of us who consolidated at 2.8%, bad for those of us at 8%.
Your are eligible for IBR/PSLF no matter how much you make. The only caveat is that, once your income is high enough, IBR maxes out at the 10-yr repayment. Payments toward the 10-year PSLF can be made under any plan.
PSLF may be even more lucrative in the higher paying specialties because they tend to have longer training. Take neurosurgery for instance: you make 7 years of minimal payments under IBR during residency then you become an attending and your IBR maxes out at the 10-yr repayment schedule. Then you make 3 additional years of payments and it's all forgiven (provided the rules don't change).
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I think that is the key point. I can't see it as viable long term anyway, and will not be politically palatable once people hear about "those rich doctors" getting off easy.
I agree. I doubt it will last (or it will be capped). Even if it does last, the difference in interest the OP is being offered significantly decreases the value of PSLF. In one case, he will have ~half the debt forgiven and in the other, he will have ~half the debt to begin with (because of the low interest rate).
IBR may work for a neurosurgeon while he/she is in training, but he/she will not likely not qualify for it once out of training. The PSLF (Public Service Loan Forgiveness) only works if you have what is called a "partial economic hardship" status. I.e. there is a difference in the amount of the standard 10 year repayment amount and what you would pay at the IBR level. Since a practicing neurosurgeon will not qualify for IBR unless he/she has a debt to income ratio of 1.0 or higher, then he/she will not qualify for the PSLF. Now, if said neurosurgeon works for a 501c3 organization and has a debt to income ratio that is higher than 1.0 then he/she may qualify for IBR, and PSLF. Though PSLF must be applied for every year and if income status changes then so can IBR status, and thus eligibility for PSLF.
The typical beneficiary of the PSLF program is someone in a lower paying specialty, who works for a 501c3 organization, and is married with children.
This is untrue. Your debt to income ratio, family size, filing status, etc determine your eligibility. Most individuals in high-paying specialties will not qualify for IBR.
Let me put it this way: if you ever qualify, you always qualify. If you don't send in your renewal paperwork, you will remain on an IBR plan but the payment will raise to the equivalent of the 10-yr repayment. However, this point is all moot for one reason that I will now explain....
No! And this is the MAJOR point that everyone seems to miss: THE STANDARD 10-YR REPAYMENT IS A QUALIFYING PAYMENT PLAN FOR PSLF!!!!!
The neurosurgeon only has to pay 3 years at the highest rate (after residency), while the pediatrician has to pay 7 years at the highest rate! If you run the numbers with the same amount of residency income, debt, family size, etc, the neurosurgeon still comes out ahead (in terms of how much is forgiven) even if he makes 50 billion dollars a year working for 501 after residency.
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