Do I need to charge interest when I lend my kids money?

I was recently approached by a college student who wanted to know what to do about her student loans.  She was getting charged a hefty interest rate on her Federal Student Loans.  Speaking of, Stafford student loan rates are going to to 4.66% for loans disbursed from July 1, 2014 to June 30, 2015 from 3.86% last year.  I asked the student if she had a good relationship with her parents.  No, seriously.  Let’s think about it.

If you are parent who has a decent amount of home equity, you may qualify for a home equity line of credit (HELOC).  You draft a loan agreement between you and your child for the entire loan that you will give him or her.  The child will lose the tax deduction on the student loans.  However, you will be able to take a deduction on Schedule A for home mortgage interest.  As long as you charge at least the applicable federal rate (AFR), this does not count as a gift.  The current Sept. AFR rate is close to 3%, a lot lower than the new student loan rates.  With excellent credit, you should still be able to find a HELOC rate under that.  You must pay interest on the interest income you get, but can have your child agree to pay that.  Also, make sure he or she buys you a a really nice Christmas gift for doing this.