How Intrafamily Loans Can Bridge the Education Funding Gap
To avoid triggering federal gift taxes, a family member can lend a student money for education at IRS-set interest rates. Here's what to keep in mind.


Editor’s note: This is the final article in a six-part series focused on paying for education using smart financial and estate planning. See below for links to the other articles, about direct tuition payments, 529 plans, Coverdell education savings accounts, UTMAs and irrevocable trusts.
Student loans are a common way to fund education, but many may not realize family members can be the source of these loans, not just the federal government or a financial institution. While it is less common, structuring an intrafamily loan may be the best way to help pay for education. This is especially true in periods when the intrafamily interest rates are low.
For it to be considered an intrafamily loan and not a gift, the interest charged must be at least the minimum Applicable Federal Rate (AFR) set by the IRS each month. If the AFR rate is lower than the federal student loan rate, this may be a nice alternative if you want to help a family member while not paying for their education with a gift.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
The lending family member can set the terms of the loan, structuring in as much or as little flexibility as desired into the repayment plan. If at any time the lender forgives part or all of the loan, any amount of loan forgiveness converts the loan into a gift, making it subject to federal gift tax laws. The interest earned from the loan is taxable to the lender and is not considered deductible for the borrower.
Unlike formal loan agreements with a financial institution, intrafamily loans can avoid the hassle of a credit check and extensive paperwork, making them more accessible for those with limited credit history or income. Additionally, the loan can be refinanced at any time. The downside, however, is that they may lack legal protections or recourse mechanisms in case of default or disputes. Any breach of trust could strain or, at worst, destroy family relationships.
Benefits of intrafamily loans:
- Intrafamily loans are often issued at lower rates than federal student loans (but must meet IRS-set AFR rate)
- Payment plan can be flexible depending on the terms set by the lending family member
- Avoids the hassle of bank bureaucracy and extensive loan paperwork
Considerations to keep in mind:
- Loan forgiveness converts the loan into a gift, making it subject to federal gift tax laws
- May lead to family disharmony if the loan is not repaid
Exploring intrafamily loans for education funding offers a flexible and possibly lower-cost alternative to traditional student loans. By meeting IRS-set interest rates and customizing repayment terms, you can provide financial support while avoiding the hassle of a bank or federal student loan program. However, keep in mind the risk of tax implications and possible strain on family relationships if the loan is not repaid. Weighing these factors can help you decide if an intrafamily loan is the right choice for your situation.
Conclusion to the series
There are myriad ways to fund a child’s education, and there is no one-size-fits-all solution ― each family should consider their financial situation, tax situation, estate plan, investment plan and/or family/personal dynamics to determine what is best.
Here’s a snapshot of the six options we’ve discussed in this series:
Row 0 - Cell 0 | Direct Tuition Payments | 529 Plan | Coverdell ESA | UTMA | Trust | Family Loan |
Tax-free growth of investments | No | Yes | Yes | No | No | No |
Contributions are subject to gift tax | No | Yes | Yes | Yes | Yes | Yes, if forgiven |
Can pay only for specific education expenses | Yes | Yes | Yes | No | No | No |
Contribution limits | No | Yes | Yes | No | No | No |
May reduce financial aid | Yes | Yes | Yes | Yes | Yes | No |
Many families use a combination of methods and vehicles for funding education, especially when multiple generations are involved. For instance, parents may set up a 529 plan to pay for their children’s college education, while the grandparents pay for private secondary education by making tuition payments directly to the school.
As an investment office serving multigenerational families, all with different circumstances, we are happy to help you explore your options for paying to educate future generations.
Other Articles in This Series
- Part one: Direct Tuition Payments: A Tax-Efficient Way to Pay for School
- Part two: 529 Plans: A Powerful Way to Tackle Rising Education Costs
- Part three: Coverdell Education Savings Accounts: A Deep Dive
- Part four: UTMA: A Flexible Alternative for Education Expenses and More
- Part five: How an Irrevocable Trust Could Pay for Education
Profit and prosper with the best of Kiplinger's advice on investing, taxes, retirement, personal finance and much more. Delivered daily. Enter your email in the box and click Sign Me Up.

Denise is a Director at Hirtle Callaghan with responsibility for leading family relationships from our Arizona office. Denise brings over 26 years of her legal and financial experience working with multigenerational client families on all aspects of their financial lives. Denise draws on her past experiences to help clients develop and implement their wealth transfer plans and makes recommendations about wealth transfer and tax-saving strategies.
-
The Y Rule of Retirement: Why Men Need to Plan Differently
If you have a Y chromosome (because you're a guy), following the 'Y rule of retirement' can help you transition to this new life stage with grace.
-
Retire on This Island for Mediterranean Living on the Cheap
This independent nation has a lower cost of living and more visa options than many of its Mediterranean cousins.
-
5 Popular Investing Strategies You Should Really Rethink
There are plenty of popular sayings that help guide your investing strategies, but which ones work? We turned to the experts and historical data to find out.
-
Do Baby Boomers Spend More on Travel? What You Can Learn from Each Generation
Baby Boomers lead in travel spending, but younger travelers may be getting better value. See how older travelers compare with younger ones — and what each generation can learn about smarter travel.
-
My First $1 Million: General Manager in Construction/Home Services, 46, Indiana
Ever wonder how someone who's made a million dollars or more did it? Kiplinger's My First $1 Million series uncovers the answers.
-
I'm a Financial Professional: It's Time to Stop Planning Your Retirement Like It's 1995
Today's retirement isn't the same as in your parents' day. You need to be prepared for a much longer time frame and make a plan with purpose in mind.
-
An Attorney's Guide to Your Evolving Estate Plan: Set-It-and-Forget-It Won't Work
When did you last review your will? Before kids? Before a big move? An update is essential, but regular reviews are even better. Here's why.
-
Nasdaq Ends the Week at a New High: Stock Market Today
The S&P 500 came within a hair of a new high, while the Dow Jones Industrial Average still has yet to hit a fresh peak in 2025.
-
Google's AI Overview Is Wrong About Life Insurance 57% of the Time, Says Study
You need more than a grain of salt when getting life insurance tips from Google's AI overview.
-
How Apple’s Tariff Strategy Could Affect Your Next iPhone Upgrade
Apple’s $100 billion US expansion could shift iPhone assembly stateside — impacting pricing, availability and your next upgrade decision.