By Dr. James M. Dahle, WCI Founder
Here's a question I received several years ago.
Q. “My parents are in a position to really help me financially in medical school. What should be considered in deciding our best moves?”
A. I have written before about how multiple generations working together financially can be highly advantageous compared to a family where every generation attempts to optimize its own financial outcome. This post will be specific just to paying for med school, though.
This post originally ran in 2016, and it was aimed primarily at the student. As I revise it for republication in 2023, I also have advice directed at parents of medical students.
Best for You or Best for the Entire Family?
The first consideration when deciding the best way to proceed is to decide if you are trying to optimize the outcome just for the student or if you wish to optimize the total financial benefit and expense to the family. This is primarily a value judgment, but if you decide the goal is to optimize the benefit to you (the student), then you simply try to get as much as you can from your parents at the best possible terms and then go with it. It's not particularly complicated—you simply take what they are willing to give. They get to feel good about their contribution, and you've maximized your outcome. However, where it really becomes complicated is when the goal is to optimize the overall outcome for the entire family.
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How Much Should You Sacrifice to Pay for Your Child's Medical School Education?
Whether you should pay for your child's schooling at all depends on many factors, including the child's attitude, your level of wealth, and your culture. I have met many doctors, particularly of South or East Asian heritage, whose parents made massive sacrifices to put them through school. Basically, the parents sacrificed their own lifestyle and a secure retirement. However, along with that sacrifice came an expectation that their doctor child would then take care of them financially for the rest of their lives. In essence, they viewed paying for the schooling of their child as investing for their own retirement.
That seems a risky proposition. Doctors fail to match, become disabled, die, get burnt out, and leave medicine all the time. They (admittedly very rarely) can get sued and lose personal assets. They can get cleaned out in a divorce, losing half their assets and half their future income. Relationships can also fall apart (i.e., the relationship between parent and child). Maybe your child will decide they are no longer willing or able to support you in your old age. For all of these reasons (and possibly my own cultural heritage), I think it's a bad idea for a parent to make a life-altering sacrifice in order to put their child through college or medical school.
You can help best from a position of strength. Decide what you can afford to do without borrowing or putting your own retirement at risk, let your kid know what that is, and move forward. Trust me, your child will figure out a way to pay for medical school. Heaven forbid they have to live like a resident for a couple of years after training to keep you from spending your retirement nest egg on tuition.
It is also possible that your child will value their education more if they have to pay for some or all of it themselves. That is highly variable, and you know your child best. Certainly, if you are in a position to assist, it would be wonderful for you to do so. Even a few hundred dollars a month for living expenses can help them keep their debt burden down significantly. If you can help more, that will reduce the student's stress and give them a leg up financially. There is a big difference between graduating from medical school owing $120,000 and graduating with a $360,000 millstone around your neck. The first is a minor inconvenience. The latter affects specialty choice, job choice, living location, marriage prospects, and even mental health. Besides, if you're rich and your child knows it, they may resent you for requiring them to take out massive student loans to pay for school only to leave them a big inheritance 40 years later.
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Tax Dependent Status
For many parents, claiming their student as their dependent can be potentially beneficial but not nearly as much as it used to be. In 2023, there are no personal exemptions on the federal tax return, and college and medical students do not qualify for the child tax credit. There is a $500 “other dependent credit” that they may qualify for, however. Even that begins to phase out at an Adjusted Gross Income (AGI) of $200,000 ($400,000 Married Filing Jointly). If you're willing to be your parent's dependent—and they're in a 40% marginal tax bracket—then is it worth $200 a year to them for you to be a dependent?
What's the downside? Well, your standard deduction as a student may be dramatically lower. If you are single and nobody's dependent, your 2023 standard deduction is $12,950. If you're a dependent, it is the greater of $1,250 or your earned income plus $400 to a maximum of $12,950. It may not make a difference in your tax situation, but it could. This could potentially increase your taxes if you have a lot of unearned income. If you don't have significant unearned income, then great, let your parents claim you if they possibly can. This doesn't matter nearly as much as it did before.
There are rules for claiming dependents, of course. Your dependent must be a US citizen, US national, US resident, or a resident of Mexico or Canada. A dependent also cannot be claimed on anyone else's taxes, including their own. You also cannot claim someone who filed a joint return with someone else. In addition to those rules, your dependent must fit into one of two categories.
The first category is a qualifying child. This person must pass five tests.
- Relationship test: Son, daughter, step-child, grandchild, brother, sister, niece, nephew, adopted child, foster child, etc.
- Age test: Under 19 or under 24 if a full-time student (and younger than you and your spouse), or permanently disabled. Unfortunately, this test alone will rule out many medical students, at least in their last couple of years.
- Residency test: Must live with you for more than half the year. Education and military service are valid excuses, however.
- Support test: The child cannot have provided more than half of their support for the year.
- Joint return test: The child cannot have filed a joint return with anyone (except to get withheld taxes back).
The second category is a qualifying relative. This person must pass four tests.
- Not be a qualifying child (see above).
- Related to you (in pretty much any way) or a member of your household for the entire year.
- Gross income test: Make less than $3,950.
- Support test: You provided more than half their support (slightly different from the child rule). If no one provided more than half their support, however, it can be mutually agreed upon as to who gets the exemption.
Educational Tax Benefits
There are tax benefits for the person who actually pays for education. There are two tax credits: the American Opportunity Credit (basically a $2,500 deduction for undergrads only) and the Lifetime Learning Credit (only available to people with a MAGI of < $80,000 [$160,000 married]). The LLC is 20% of up to $10,000 spent on qualified educational expenses. Many parents capable of providing significant help to their medical student children aren't going to be able to use either of these credits.
You used to be able to deduct $4,000 in tuition and fees. Well-to-do parents were always excluded from that. Now everyone is.
The student loan interest deduction of up to $2,500 of interest paid may also be useful, but high-income parents are again excluded by the phase-0ut income limit starting at an AGI of $75,000 ($150,000 married).
In a situation like this, it is also useful to be aware of the gifting laws. Essentially, any person can give $17,000 a year  to any other person without having to file any kind of paperwork or pay any kind of taxes. The gift tax actually isn't a tax most of the time. On a federal level, if you give more than $17,000 a year, it simply comes out of your estate tax exemption, which in 2023 is almost $13 million ($26 million if married and indexed to inflation) and is probably enough for all estate and gift tax considerations for most docs.
But just in case, it might be wise to preserve it. Also, be sure to look into whether your state has an estate tax/gift tax with a much lower exemption level. You can preserve the exemption (and avoid having to file a gift tax return) by only giving $17,000 a year. But keep in mind that it is $17,000 from each person to each other person. You can give your daughter $17,000 a year, your spouse can give your daughter $17,000 a year, you can give your son-in-law $17,000 a year, and your spouse can give your son-in-law $17,000 a year. That's $68,000 a year all without using up a bit of that exemption!
In addition to the $17,000 a year, the parents can pay tuition directly to the school without using up that exemption. Once you hit $17,000 a year, you're required to file this form with the IRS. But if you're like most, you can just work the laws to avoid having to file it.
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The parents may prefer not to give the money to the child but rather to loan it. This can be done informally, especially if under the gift tax limit—”I'll ‘loan' (aka gift) you $17,000 a year, and you can pay me back (aka gift it back to me) when you're an attending”—but if you want to formalize it, the IRS technically requires you to charge a market rate for interest (around 5% for long-term loans in 2023). If you do not, the “forgiven” interest is considered a gift and is subject to gift taxes (again, $17,000 a year will cover a lot of forgiven interest). There are special rules if the loan is less than $10,000 (i.e., you don't have to charge interest) and if it is between $10,000-$100,000 (limitations on the deductibility of the foregone interest of a below-market loan), so be sure to read those if you're going to do this.
Mortgage or Margin Loans
Sometimes parents don't have the money but have access to credit at rates and terms that are much better than what is available to the student, especially a grad student relying on private lenders. As a general rule, I think if someone is going to borrow for school, it ought to be the student. Prior to borrowing money, the parents should be aware of several things:
- There is no PAYE/IBR or PSLF for parental loans (unless consolidated into non-parental loans). While getting a loan at 4% instead of 7% seems great, it could end up costing hundreds of thousands more if those 7% loans could have been forgiven.
- If the student can't or doesn't finish school, doesn't match, and/or can't pay back the loans, the parent is still on the hook. The 2023 unmatched rate has been climbing in the last few years, and it is now 6% for US MD students, 8% for US DO students, and 55% for other applicants. There's real risk there.
- If the student dies, the parent will still owe the money. This can be worked around by purchasing inexpensive term life insurance on the student's life, of course. The interest savings will generally more than cover the insurance costs.
However, a deductible HELOC or mortgage at 5%, or even a low-cost margin loan, is obviously far better than an unsubsidized, nondeductible 6% or 8% loan.
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Outside the Box
There are other, outside-the-box ways to assist a child. We had a post years ago about a medical student who used 0% credit cards to dramatically reduce the interest costs of her student loans while in medical school. Parents, especially well-to-do parents, often have access to far more credit than a medical student, and they can use similar techniques.
If the student has some earned income, the parents can do the “mommy match” and help the student max out Roth IRAs or do Roth conversions. For example, if the student earns $6,000 in the summer but needs that $6,000 to pay expenses, the parent can give the student $6,000 for expenses while the student puts their $6,000 into a Roth IRA, never to be taxed again.
At some universities, children of employees receive dramatic tuition reductions, often 50% or more. When it comes to medical, dental, or law school tuition, this may be the equivalent of a large raise, so serious consideration should be given to working for the school your child attends if this is an option.
Parents are often savvier financially than medical students. Of course, that's not saying much since medical students may be the financially dumbest people on the planet. At any rate, a little financial advice from the parent may go a long way. Here are some examples:
- “Don't take out your loan money until you actually need it.”
- “Use a high-interest savings or checking account.”
- “Don't use that loan money to buy a brand new car.”
- “You did apply for the food stamps/Medicaid etc., that you're eligible for, right?”
- “If you love pediatrics and orthopedics equally, choose orthopedics.”
- “Get a roommate.”
- “Quit drinking expensive beer.”
In summary, there are many ways that parents COULD help out a medical student. Whether they can do so or should do so are separate questions. But there is no doubt that when multiple generations work together toward common goals, real synergy can happen.
What do you think? Did your parents help you out financially in medical school? How did they do so? Would you help your child get through professional or grad school? How do you plan to do so? Comment below![This updated post was originally published in 2016.]