I’ve been inviting readers to let me share their family financial feuds and offer my advice.
The following is a dilemma one reader, who wrote to me during an online discussion, had with a sibling.
The family background: “I am helping my niece pay for college,” the person wrote. “I’m glad to do it, and she is doing terrifically well — nearly straight A’s in a demanding program, got selected to a prestigious honor society, and is volunteering some time to a worthwhile cause — all the right things.”
The financial background: There was a plan to pay for college. The reader volunteered to cover about 40 percent of the niece’s education expenses. The young woman’s father, the reader’s brother, agreed to pick up about 40 percent, and the niece would make up the rest with earnings from summer jobs and a small scholarship.
The battle: The dad reneged on his part.
“To my surprise, I saw student loans come up on her financial account at the college (to which I have access since I’m listed as ‘donor’ to her account). I asked her and her dad about this, and it turns out he decided it was a better use of his money to contribute to his retirement account! Granted, his retirement is not too far away. He is 60 but still that was not the plan.”
The father decided his share would instead be covered by student loans taken out by the daughter. She has unsubsidized and subsidized federal Stafford loans. In the case of a subsidized Stafford loan — based on financial need — the federal government pays the interest while the student is enrolled in school.
With an unsubsidized loan, which is not based on financial need, the student is responsible for the interest payments, which begin to accrue immediately unless the borrower decides to defer these interest payments until after graduation. Most students take the latter option, in which case the interest is tacked on to the loan. This, of course, increases the size of the loan. The interest rate for unsubsidized and subsidized loans is 4.66 percent for the 2014-15 academic year.
Is it fair that the father defaulted on the deal?
“I feel like he is breaking our agreement, and making his daughter pay the cost of something he had agreed to cover,” the reader noted, “but he thinks it will all come out even in the end when he pays it off, although now I don’t completely trust he will live up to that.
“So, is he right? Seems like a bad plan to me, as I’m a strong believer in the ‘pay as you go’ theory. What do you think?”
The bottom line: I’m siding with the reader.
Although the father is right to be concerned about saving and investing enough for his retirement, he broke his word. I would feel like a chump if I was helping a relative with my savings only to find out the child’s parent was sticking her with loans.
I often hear experts say that when it comes down to borrowing to help your kids go to college or investing for your own retirement, take out the loans for school because you can’t borrow for retirement.
It’s true and yet it often gives people the license to borrow too much for college without considering the risks of that financial move as well. What if in three years the market tanks and the dad’s retirement portfolio has lost money? Then what? The answer is that he won’t have the money to pay off the college loans.
If the father didn’t have enough cash to keep up his end of the bargain, he should have never made the deal. If he realized later that he couldn’t both pay for college and save for his retirement, he should have been more forthcoming to his sibling. Perhaps together they could have come up with ways to avoid the loans.
But here’s the thing. Keep your word to your niece. Because as angry as you have a right to be with her father, it’s still about the young woman. Even if the father leaves her with the debt, your 40 percent will make her financial hole a lot less deep.
Washington Post Writers Group
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