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"College" is in this case a proxy for "entrance to the socially-defined middle class". Parents in general (or at least the middle-class ones that would have mo

"College" is in this case a proxy for "entrance to the socially-defined middle class". Parents in general (or at least the middle-class ones that would have money to lend/give for college) want their children to be at least as high in the social hierarchy as they are. Financing someone's business is much more of a mercenary decision; "do you run your own business" isn't really a social class marker in the way "did you go to college" is. It's strictly for the money (or for some, a kind of consumption in the form of a "hobby business" that doesn't actually make money).

001sky 13y ago
The purpose of borrowing from your parents is different, though. The transfer of wealth from parent to sybling via "paying for" college is (as you rightly point out) not really a loan, but a type of "grant". More specifically, its one that is both socially acceptable and tax beneficial[1]. The logic of Romney's positin on borrowing is that it is <market efficient>. That is to say, the parent has more information on the borrower than a bank, and therefore is in a better position to measure risk and avoid the typical market failures that correlate with the type of non-stochastic uncertainty that cling to first-time founders with no track record[2]. Your parents have much lower information gathering costs and monitoring costs than a bank, in other words. Also, since the return on the investment can be higher than what that money would otherwise get in a normal debt investment, the idea would be a win/win also in theory for the parents. This is, even with a true debt structure (ie, repayment with interest) which is again different from the way many parents 'pay' for college. [1] Gifts over 10k are taxable. [2] This is not technology risk, which is a different ball of wax. This is the risk that would keep a bank lending you money for a low-tech business, like a lemonade stand.
- sokoloff 13y ago
  Ref: 1: Assuming US law, the annual gift tax exemption is $14K (per [giver, recipient] pair, so a couple may gift $28K to a single recipient, or $56K to another couple), there's a process to combine 5 years' worth at once, and amounts over the annual exemption limit count against a lifetime exemption and then are taxable to the donor. I can't fund any ordinary circumstance under which a gift would be taxable to the recipient. http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Empl...
  - 001sky 13y ago
    Thanks for the updated info, this was traditionally conformed to the $10K level with money laundering. The student would not be 'in business' so it would be taxable at the level of the parent only (no business entity), and not be booking the gift as income presumably (no employment or services renedered). I'm not sure if the married parents are each able to gift out of the estate or not, again this may have been revised.
  - deleted 13y ago
    [deleted]
- rayiner 13y ago
  > [1] Gifts over 10k are taxable. The annual exclusion is $14k per donor per recipient. So a married couple can give at least $84k per year to their three kids (total). But in practice, that's not the relevant limit. Amounts over $14k per donor per recipient per year count against the lifetime exemption, and are only taxed once that exemption is exceeded. Currently, that exemption is over $5 million. Its true that tuition paid directly to schools is not taxable, independent of any annual or lifetime exemptions, but the high lifetime exemption virtually assures that nobody who isn't extremely rich will ever hit the gift tax even with direct cash gifts.
  - gohrt 13y ago
    > but the high lifetime exemption virtually assures that nobody who isn't extremely rich will ever hit the gift tax even with direct cash gifts. and once you pass $5M, it is simple enough to set up a trust or corporation to give the child control of the funds.
  - 001sky 13y ago
    These are good points, and I stand corrected. The laws have changed on this substantially over the past 10 years or so. There is a brief summary of the changes here: http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/What%27s-New---Estate-and-Gift-Tax http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Empl... It turns out there is also, this: Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse
ef4 13y ago
Maybe there are some families where a parent funding their child's business is in it "strictly for the money", but I've never seen one. Why would you believe that parents who would selflessly spend $100k+ on college without expecting any personal monetary ROI wouldn't offer money on the same terms for their kid to start a business? In either case you're buying experiences and trying to create opportunities for your kid. Even from a purely educational perspective, launching a business can be far more educational than lots of college programs.

001sky 13y ago

The purpose of borrowing from your parents is different, though. The transfer of wealth from parent to sybling via "paying for" college is (as you rightly point out) not really a loan, but a type of "grant". More specifically, its one that is both socially acceptable and tax beneficial[1]. The logic of Romney's positin on borrowing is that it is <market efficient>. That is to say, the parent has more information on the borrower than a bank, and therefore is in a better position to measure risk and avoid the typical market failures that correlate with the type of non-stochastic uncertainty that cling to first-time founders with no track record[2]. Your parents have much lower information gathering costs and monitoring costs than a bank, in other words. Also, since the return on the investment can be higher than what that money would otherwise get in a normal debt investment, the idea would be a win/win also in theory for the parents. This is, even with a true debt structure (ie, repayment with interest) which is again different from the way many parents 'pay' for college. [1] Gifts over 10k are taxable. [2] This is not technology risk, which is a different ball of wax. This is the risk that would keep a bank lending you money for a low-tech business, like a lemonade stand.

sokoloff 13y ago
Ref: 1: Assuming US law, the annual gift tax exemption is $14K (per [giver, recipient] pair, so a couple may gift $28K to a single recipient, or $56K to another couple), there's a process to combine 5 years' worth at once, and amounts over the annual exemption limit count against a lifetime exemption and then are taxable to the donor. I can't fund any ordinary circumstance under which a gift would be taxable to the recipient. http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/Frequently-Asked-Questions-on-Gift-Taxes http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Empl...
- 001sky 13y ago
  Thanks for the updated info, this was traditionally conformed to the $10K level with money laundering. The student would not be 'in business' so it would be taxable at the level of the parent only (no business entity), and not be booking the gift as income presumably (no employment or services renedered). I'm not sure if the married parents are each able to gift out of the estate or not, again this may have been revised.
- deleted 13y ago
  [deleted]
rayiner 13y ago
> [1] Gifts over 10k are taxable. The annual exclusion is $14k per donor per recipient. So a married couple can give at least $84k per year to their three kids (total). But in practice, that's not the relevant limit. Amounts over $14k per donor per recipient per year count against the lifetime exemption, and are only taxed once that exemption is exceeded. Currently, that exemption is over $5 million. Its true that tuition paid directly to schools is not taxable, independent of any annual or lifetime exemptions, but the high lifetime exemption virtually assures that nobody who isn't extremely rich will ever hit the gift tax even with direct cash gifts.
- gohrt 13y ago
  > but the high lifetime exemption virtually assures that nobody who isn't extremely rich will ever hit the gift tax even with direct cash gifts. and once you pass $5M, it is simple enough to set up a trust or corporation to give the child control of the funds.
- 001sky 13y ago
  These are good points, and I stand corrected. The laws have changed on this substantially over the past 10 years or so. There is a brief summary of the changes here: http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Employed/What%27s-New---Estate-and-Gift-Tax http://www.irs.gov/Businesses/Small-Businesses-%26-Self-Empl... It turns out there is also, this: Beginning January 1, 2011, estates of decedents survived by a spouse may elect to pass any of the decedent’s unused exemption to the surviving spouse

ef4 13y ago

Maybe there are some families where a parent funding their child's business is in it "strictly for the money", but I've never seen one. Why would you believe that parents who would selflessly spend $100k+ on college without expecting any personal monetary ROI wouldn't offer money on the same terms for their kid to start a business? In either case you're buying experiences and trying to create opportunities for your kid. Even from a purely educational perspective, launching a business can be far more educational than lots of college programs.