The number of parents and grandparents co-signing student loans is on the rise. As college costs rise, students may be forced to take out student loans in order to afford their degree. Banks and credit unions that issue private student loans typically require a co-signer before they will give a student money, and even some government student loans require a co-signer. Here are some things to consider before you agree to co-sign a student loan.
What does co-signing mean?
Many people have no idea what co-signing a loan actually means. They simply sign their name on the dotted line, and assume the student will eventually repay the loan. Co-signing means you are an equal borrower, meaning it is as if you are personally taking out the loan. You are guaranteeing that the loan will be paid.
So what?
If your child/grandchild can’t, or doesn’t, make the payments on their student loans, it is your responsibility to pay them off. That ‘s right... you are on the hook for 100% of the loan principal and accrued interest. Even though you didn’t receive or spend the money, you are responsible for paying it back.
What happens if I can’t afford the payments?
Tough luck... Government issued student loans will not be discharged, even in a bankruptcy. The government can (and will) garnish your wages to get their money back. Someone will eventually pay these loans off, and as a co-signer it will probably end up being you. Although private student loans may be discharged in a bankruptcy, do you really want to declare bankruptcy for loans you didn’t even use?
But my child will pay them back!
According to the Federal Trade Commission, as many as 3 out of 4 co-signers end up making the payments on the student loans. 75% of co-signers end up saddled with the debt. Those are really bad odds!
What do you suggest?
I recommend NEVER co-signing a student loan. Your child/grandchild may not be able to attend their #1 university choice, or may have to take a year off to work and save money because they simply can’t afford it. That’s okay.... Ending up paying of a loan you didn’t even benefit from is a really bad investment on your part.
The only way I can stomach seeing someone co-sign a student loan is if they could easily pay off the debt without it affecting their own financial goals. And if that is the case, they might want to consider gifting the money to the student instead of co-signing the loan.
So what do you think? Have you ever co-signed a student loan? Have you been forced to make any payments? Are you a student that needed a co-signer? Are you making your payments? Would love to hear your stories!
Alan Moore is a fee-only financial planner and founder of Serenity Financial Consulting in Shorewood WI. Connect on Google+. You can contact him at alan@serenityfc.com, 414-455-5313, or visit his website at www.SerenityFC.com. Want more education? Download your free guide to the “10 Easy Steps To Securing Your Financial Future Today.”
These conversations need to happen, but we don't seem to have them often enough.
The stories you hear about kids graduating with $100K of debt applies only to kids who's parents do not qualify for the loans. If parents qualify for the loan, the kid can only borrow $5500/year, leaving the parents to foot the rest of the bill. In some families that is not feasible, as the family is working hard to pay their existing bills.... But because of Government red tape, if the Govt. determines the parents qualify for the loan, the student can not borrow more than $5500.