(888) 234-7982

(from Ron Lieber’s article in the Your Money section of the New York Times on September 28, 2012.  Click here for the original article.  Ron Lieber is the “Your Money” columnist and editor of the Bucks Blog for the Times.)

It’s much tougher than it used to be for young Americans to make their financial way in the world, given the increasing cost of college and the challenge of finding a job with benefits and a wage high enough to cover the basics plus the servicing of any student loan debt.

So it’s no surprise that many parents and other family members choose to smooth the way if they can, going into debt themselves to help pay for college and putting off their own retirement savings to help children in their 20s with health insurance, rent and other expenses. Other families, however, can’t or won’t help, which puts their family members at a distinct disadvantage.

As I mentioned briefly in my column last week, the descendants of a farm family from Illinois have an entirely different way of providing an assist to the next generation — a no-interest loan fund that assists family members who need help paying for educational expenses.

Many of you wrote to me wanting to know more about how it worked. Others reached out directly to 82-year-old George Lewis, the Quincy, Ill., lawyer who helped draw up the agreement that governs the loan fund, the Hersman Andrews Lewis Scholarship Trust.

“I got several calls,” he said. “I’ve been surprised that no one ever heard of the idea. I assumed other families did something like it.”

The family loan pool strategy was new to everyone I spoke to in the last two weeks, but it’s not entirely new. The most prominent example is the one Berry Gordy, the founder of the Motown record label, cites in his 1994 memoir “To Be Loved.”

His family built a savings fund with $10 monthly contributions from its members. People who wanted to borrow from it had to go before a full family meeting to make the request, and they didn’t get anything without an unanimous vote of approval.

In 1959, as a 29-year-old songwriter looking to start his first record label, Mr. Gordy made his pitch and won over the group. The $800 loan had a 6 percent interest rate, and he was expected to pay it back within a year. Just in case, the family made him sign a promissory note that included a scribbled addendum requiring him to turn over future royalties if he couldn’t make the payment within a year.

Suzette Haden Elgin, in a book called “The Grandmother Principles,” offered her own notion of a family loan fund that grandmothers can initiate. She suggests asking for a small deposit from everyone in the family, including children. Having the younger ones pitch in can help give them a stake in the process and a reason to track the fund’s growth and its beneficiaries.

The Hersman Andrews Lewis fund was indeed started by a grandmother, though today it’s a trust and a handful of trustees consider loan applications and make decisions through a majority vote. According to the trust agreement, the trustees take character, motivation and scholastic performance into account.

Trustees also consider the field of study, though the parameters are broad. Applicants can use loan proceeds for college at the undergraduate or graduate level or for a vocational education that leads to a certificate or license. Expenses for tuition, books, fees or room and board are all eligible. One law school graduate got a loan to pay for a review course for a state bar exam.

The loans are no larger than $5,000 per academic year or $10,000 in total at any one time. Any no-interest loan above that amount involves tricky Internal Revenue Service rules governing gifts and taxes.

Family members who contribute to the fund, which now has more than $111,000 in it, do not get a tax deduction. Still, that hasn’t stopped them from bidding on various auction items every two years when the extended family gathers for a reunion. The balance of the fund is partly in safe, low-yielding accounts, though the trustees also made a bridge loan to older family members who were downsizing to a retirement condo from a larger house.

In 42 years, the fund has made 114 loans totaling more than $169,000, and there have been few difficult collection cases save for an incident involving a volatile divorce. “We don’t sue,” Mr. Lewis said.

Loan recipients sign a commitment letter promising to “exercise my best efforts” to repay the debt “within a reasonable time after I am financially able to do so.” The trust agreement specifically notes that the trustees should not demand any payment until at least a year after loan recipients finish their studies.

The lack of loan defaults may have something to do with the smaller loan amounts. But there may also be something psychological in play here, too, given that if you don’t make good on your debt, you’re stealing from the entire family and everyone may find out about it. Trustees do also reserve the right to forgive the debt in cases of extreme hardship.

The Hersman Andrews Lewis fund already has one spinoff. When the widow of a family member died, she left $100,000 to the fund but also asked that her own family’s descendants get access to loans. Rather than expanding eligibility to the original fund further, the two families chose to split the money in half, with $50,000 going to an entirely new fund.

That loan pool is now known as the “Aunt Trude Education Fund,” named for Gertrude Ruff Lewis, who was married to Carl C. Lewis. According to their grandniece, Katharine Newton, who is one of the trustees, they were of modest means. Mr. Lewis was a vocational agriculture teacher and his wife was a homemaker.

Still, they felt strongly enough about the importance of education that they wanted to help their descendants get as much of it as possible after they were gone. “They had no children of their own, so we were like children to them,” Ms. Newton said. “This was their legacy to their family.”