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A colleague of mine has student loan debt of ~35K at 7% APR interest. I have more than enough principal to pay off his debt, and for my troubles (and risk), I think asking for a 4% APR is not out of the question. Assume a $450 monthly minimum payment until it is payed off.

I understand there is risk involved with doing this - If he goes ghost on the loan, I would have to take him to collections, and the legal fees might outweigh any benefit I would have gained. But assuming all goes well, and he remains gainfully employed until he is able to pay back the loan (plus interest) in full, I stand to make a decent amount of money on this loan.

What is the easiest/safest way to make a legally binding agreement, and to keep track of said loan/balance? Are there any websites/third parties that can handle this for me? I suppose this is akin to how my mortgage is owned by Freddie Mac, but is serviced by PHH Mortgage. Are there any 3rd party servicers that would assist in personal loans such as this? Are there any risks I am overlooking?

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    There are worse things in the world, but this is pretty high up the list. It will take 7.5 years to pay you off. A lot can happen during that time. He can lose his job, move, get married, die, or any combination of these. With the best of intentions from him you are left holding the bag. The mortgage lender has a lien on your property. There's no equivalent protection for you. A legal promissory note is often worth the paper it was printed on.
    – JTP - Apologise to Monica ♦
    Jun 29, 2016 at 20:36
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    Ahh, hadn't thought about the collateral aspect of the deal. With my home loan, they can easily take ownership of my house if I stop paying. If he stops paying, it's not like I get to claim his Masters Degree.
    – dberm22
    Jun 29, 2016 at 20:43
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    Note that the interest you get is taxable, and you will have to pay taxes on the 4%. Note also that you make (in average) more than 4% on the market; at a risk, but a lower risk than such a loan. Of course, if he is a good friend - your call. I have done similar loans to good friends. Just know what you are doing.
    – Aganju
    Jun 30, 2016 at 1:34
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    This is just total madness. For what possible reason would you want to even consider this? Note that, even, the advantage to your friend is trivial and not even close to being worth the confusion and complications. It's a case where your "calculator must be broken" to think this is even vaguely worth considering?!?! Hopefully all the advice here helps you to rethink this one!
    – Fattie
    Jun 30, 2016 at 12:55
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    @dberm22 : yes I do think that. But that's a personal decision and evaluation.
    – Aganju
    Jun 30, 2016 at 13:32

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Are there any risks you're overlooking? I think if you're considering this at all you're overlooking all of the risks... namely, if you think the issue with him not paying on the loan is the procedure involved with initiating collections or taking him to court for a judgement you're severely underestimating actually collecting after you're awarded a judgement. Typically when people stop paying a debt, its because they don't have money. A judgement doesn't change that.

Now you could include in the promissory note a lien on some piece of his property, if he has one. Even with the lien and a judgement against him you can't do much.

There are laws related to lending by individuals, related to debt collection, maximum/minimum interest rates; there may even be a law that mandating individuals may only assess simple interest. I doubt you'll be able to find a formal institution that will take over as nothing more than an administrator, though you might as well start researching how to sell the debt once your colleague defaults.

IF you can legally amortize the loan at 4% and $450 per month, you're not made whole until about month 78. Months 79 through about 90 will be your profit zone. At this rate of return I'd just buy a muni...

If you're willing to kiss this money good bye, and lending it generates more amusement to you than setting it on fire, go for it!

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    Hmm, it appears everyone agrees this is a terrible idea, (carries much more risk than investing in the stock market, and less yield than even the safest investments, bonds, etc). I'm a good friend to this person, but I guess not THAT good of one to actually follow through with this plan.
    – dberm22
    Jun 30, 2016 at 12:36

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