Parent loan or liquidate equity
My son inherited social security benefits and a small retirement fund when his father passed 3 years ago. He will be staring his spring semester and we had discussed liquidating some of his funds. I had put it into a custodial fund where it has grown to a little shy of 200,000. Would it be better to sell the equities to fund his education or take out a parent loan so that his fund can grow. Currently the growth rate of his funds have averaged 20%. This beats out the 5 to 10% interest I would pay on a parent loan. I’m hopping that in a couple years, we can pay off the parent loan with the strong growth of the funds. What would you do?
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Hi, growth isn't guaranteed. I like to think of the inverse when considering something like this.
What's best for you and your family if the custodial fund were down 20% this year?
Personally I would double check whether it counts as contribution on the child part or not
I always err on the side of leaving money invested and only taking out money if you have to, especially when someone is young
Once they have 250,000 invested in a long-term index fund, they’re on their way to being able to retire whenever they want or work only where they want. Giving that up seems like something that really takes a lot of thought before you choose to do that.
Have you filled out the sample FAFSA online to see what your expected family contribution is? I might start there.
I'd be careful with the parent loan. Just because the market is doing well right now doesn't mean the market could be down 30% in two months. Realistically, over a period of something like 30 years, the fund will average 7.5-8% annualized growth meaning that it sounds like the growth of the fund will be almost equivalent to your interest rate.
One thing I notice that you have completely omitted from your question is what your personal financial situation is. What would a fifty thousand dollar loan at say 7% do to your financial situation?
In the long term, the best thing you can do for your son is to ensure that you are not a financial burden in your retirement years. It's like putting on an oxygen mask before helping others. If you are well-taken care of, he can recover from his fund being used for the cost of education right now. He still has forty years of good working life ahead of him. You don't.
Another thing that just flagged in my mind is that the account is custodial meaning that once he hits the age at which it transfers to his own ownership, you would have no access to the money. You would be asking him for the money directly.
IMHO, that's a very awkward conversation to have: "Would you please help me pay off the loan I took out for your college from the fund you have? I was expecting you to help me with that after five years."
For the sake of familial peace, I'd just use the account.
How much would it cost to fund the rest of his education?