The alternative side to this discussion is that I am over 50 with 25 years of experience (i.e. a much higher salary than an entry level graduate) and I'm with a company where random layoffs are common place.
Do I really want to take on a second mortgage where the chances of my income going down in the next 5 years is higher than average? We have very little debt on the other hand and good equity in our home to tap into.
Is it too risky?
Risk tolerance is a personal choice, cannot decide that for you, but can hopefully explain the situation differently so you can consider the impact.
Firstly, what you are doing here is a generational wealth transfer. My argument is that you do it later, rather than sooner.
If you do it sooner (IE give him the money now so he takes less loans)
- You reduce his financial burden connected to his education
- This can make life easier, and seems like a caring thing to do.
- Life shouldn't always be easy. Many people on full rides from their parents have no buy in to the study. Put a single mom mature student paying their own way up against an entitled kid driving a Porsche. Who works harder?
Not saying your kid is entitled, but he will more susceptible to those traits IMO. Also, to counter that, it might be that due to the workload of raising a family/working and college that the Single Mom may get a lower grade, but that is assuming the other student is putting 100% of their energy into study (doubtful).
When I went to NYU I can see a stark difference between the financial planners who were sent to the course at their employers expense, vs those who were doing it for themselves as career changers.
Next - a Pro for giving today
- You save money by giving it now. Giving now isn't a bad financial decision on some levels - if you give it now then you take advantage of low interest rates, and he has less loan interest to pay - you'll both be better off here financially by funding his debt via your mortgage in terms of money flowing out of the household.
Risk Risk Risk.
To counter the point on giving now, you increase liability beyond $50K by giving now. If you take this money out of your home equity you place a lien on your home. I understand you feel the risk of unemployment is low, but what if it does happen? The opposite of your point that you are 50 and earning good money is that your kid is not, so they could not go to a bank and ask for an unsecured loan of $50K once student loan deadlines have passed. You are locking money out of your estate, and the risk is that you could lose the property, or sell in a firesale to cover your liens.
Going back to my point on giving now not being a bad financial decision, you can calculate the fixed cash amount of the loan - $50K, you have a spread between the rate he would have paid as a student, and the rate you would pay as a HEL/ 2nd Mortgage. It is likely to be in the 3-4% range, or upto $2000 per year (but may be tax advantaged, so reduced from that).
So that for me is the root of it- is it better to put yourself into debt to save him $2000 per year in interest? What does the $2000 buy?
- It might create a more lackadaisical attitude to working/studying as there is less pressure.
- It might create a more pleasant environment for them to flourish in.
The above depends on perspective, and the individual child.
The root of the matter however, is that we are debating a generational wealth transfer,
and its timing. I am not saying you absolutely should not pass on wealth, but you can chose the timing of it. I would argue that if you need to take out a 2nd mortgage you aren't in a strong enough financial position right now to help this much
today. But you could be in a year or two.
You think you are in a position to repay the debt on your home - so why not hold onto that equity, and allocate the money that you would use to pay down the debt to save for a gift for the kids, or if you decide to sell and downsize your home, release equity there without increasing liability through a lien.
The point being, you still are supporting them 'in life' but you are doing so in a less risky manner AND you are teaching them the value of a dollar in terms of owning their own debt for a while, feeling its pressure and burden, and later lifting it from them when it is safe for you to do so. The result is they will pay out a bit more interest for this lesson.