Family Loans: Can Your Family Pay for Your MBA? (And Do You Want Them To?)

Let’s face it, an MBA is not cheap. And, no matter how much a graduate-level business education pays off, MBA loans can be a bit frightening. Even older applicants that currently earn a comfortable salary and have some money stashed in the bank face difficulties.

But, these difficulties shouldn’t stop serious applicants from applying to business school because there are as many different MBA loans as there are accepted candidates. But it all depends on where you’re from, where you study, how early you begin the application process, what your credit looks like at the moment, and the scholarships and bursaries available.

Even with a myriad of institutional financing avenues, many students look to their parents (or grandparents) with big eyes and an open wallet. Indeed, there are many areas of the world where the family loan is a cultural norm.

Different types of family loans and commitments

There are many ways parents, grandparents, siblings, cousins, friends, and anyone else that wants to can rally behind future graduates with MBA loans. The type of support, however, varies.

Typically, financial assistance from families falls into three (broad) categories:

• Tax-free gifts that are not subject to repayment
• Family loans (with or without interest and terms)
• Co-signer or guarantor responsibilities on MBA loans

Each one almost carries specific obligations for both parties. And, they are all likely to include some third party, whether it is a bank, tax department (such as the IRS), or notary public.

As such, family financing can become almost as complicated as going to a bank. You may not be declined for family loans based on your current credit status, but you still need to jump through financial and legal hoops.

Education, the gift of a lifetime

Just about everywhere in the world, the receipt of a monetary gift is seen as income, but there are tax-free gifts.

While five bucks here and there isn’t much to speak about (and not enough to buy lunch in many parts of the world), thousands and tens of thousands are something the government wants to know about. What the government wants to know, and the financial ramifications of that, however, varies from country to country.

In the United States, for example, an annual limit is set for tax-free gifts. In 2016, the maximum amount for tax-free gifts is US$14,000. As soon as that gift becomes US$14,001, the IRS expects income tax to be paid (if only on US$1). However, just about any amount can be paid directly to educational institutions and remain tax-free.

This applies to everyone; friends can give tax-free gifts in the same way parents can. It’s also important to note that the IRS offers a lot of flexibility on this. Both parents can make gifts to their son or daughter, and the same parents could make similar gifts to that child’s spouse. But, if that much money is flying through the family as gifts, it’s crucial to bring in the assistance of a financial advisor.

Similar rules apply in countries like India, but so do different limits. Family members can gift as much as they like tax-free. But, when a non-institutional, non-familial individual wants to make a gift, thresholds are imposed.

MBA candidates lucky enough to have family or friends that want to make monetary gifts towards educational expenses should investigate the governmental policies in their country. After all, it will feel a lot less like a gift if either party must pay unexpected taxes on the transaction. (International students should also enquire about potential penalties for transferring said monies offshore.)

When they’ll help, but gifts are not an option

Not everyone has a rich aunt willing to give money without expecting any of it back. Even when the funds are there, many family members regard it as a duty to ensure financial literacy in the next generation.

Whatever the reason, family loans are perhaps more common than financial gifts, especially for educational purposes.

But, loans must also conform to national fiscal regulations – even if the money will be paid back, and even if there is no interest on the principal. And policies vary drastically between countries on this front.

In the United States, all loans over US$10,000 must carry interest. And, there is a minimum interest rate required based on the date of loan dispersal plus the duration and amount of the loan. The IRS also wants to see documentation – and affected parties should note that the IRS sees a big difference between a term-based loan (with regular repayments upon set dates) and demand loans which can be repaid at any time (with the latter being somewhat more difficult to navigate).

While a financial advisor is not necessarily needed (though still advised) for these arrangements, it’s essential that both parties agree to the rights and responsibilities of this transfer. Though it’s not a requirement everywhere, a legally-binding document is the best way to ensure the sweet gestures of well-meaning family members don’t sour over time.

What is a co-signer? do you need one?

When a loan from outside the family channels is required, there is often still a need to involve a family member. While Prodigy Finance does not, most banks require a co-signer or guarantor if the loan required is out of balance with the applicant’s credit status - or if the applicant is a foreign national (and does not have permanent or a long-standing temporary residency).

Co-signers are typically required to reside in the country where the loan is dispersed. A Chinese applicant to a French bank will need a co-signer with French status (and a reasonable credit history) to sign on their behalf. This is where it often becomes problematic for international students whose families don’t have the means to gift or loan money, and cannot support as a co-signer or guarantor. 

Fortunately, (most) international students that can’t or don’t want to rely on family support can apply for post-graduate financing through Prodigy Finance; with no co-signer required.

And, as Prodigy Finance loans cover a maximum amount equal to tuition costs, students will still find a gift from a rich aunt or a loan from grandma truly useful. After all, students still need to eat every now and again (and remember, five bucks doesn’t even cover lunch in some places).