Think Twice Before Co-Signing Student Debt

Parents, think twice before co-signing student loans for your kids.

Or at the minimum, read last week’s article in the Wall Street Journal about the financial havoc caused when kids stop paying on their loans, leaving creditors to come after already cash-strapped parents.

Reports the Wall Street Journal:

“After years of facing all sorts of financial pressures they never expected, from adult kids moving back home to their own parents needing help to retire, empty nest parents are struggling with a new headache. Thinking it was only natural to want to help children and grandchildren, many co-signed student loans. Now, they’re becoming the latest victims of the nation’s mounting problem with student-loan debt, which surpassed the $1 trillion mark last year.”

5 tips to keep you from getting into trouble with student loans

Encourage your kids to think strategically before borrowing for school

How much do they expect to earn once they’re in the workforce, and what size monthly loan repayments will be required? Does the increase in earnings justify the investment, or should they consider a less expensive school or a pay-as-you-earn, part-time program?

Do your best to avoid co-signing student loans

Federal government student loans do not normally require a co-signer, so exhaust all federal loan programs including Stafford, PLUS and Grad PLUS loans before turning to private loans.  Almost all private student loans, made through banks, will insist on a credit-worthy adult co-signer to ensure they get paid back. And in fact, it’s hard to blame them.  According to the Consumer Financial Protection Bureau, cumulative defaults on private student loans already exceed $8 billion, and represent over 850,000 distinct loans.

Understand the differences between federal government loans and private loans before co-signing

Federal loans have fixed interest rates while most private loans have floating (and possibly increasing) interest rates.  Private loans have fewer and less flexible repayment options if the student gets into trouble, so once in the hole, it’s harder to get out.

Consider the reality of your situation carefully; it’s OK to say “no”

Parents and grandparents who co-sign student loans may find themselves on the hook for repayment at the worst possible time — when they retire, downsize, or face growing medical bills. And what seems manageable today may not be so in the future, due to rising interest rates that make payments increase over time, or your own diminishing resources.

Make sure you truly understand what it means to co-sign a student loan

When you co-sign a loan, you are on the hook for full repayment if the other co-signer is not able to make payments. Experts warn it is extraordinarily difficult to get out of paying student loans, even in bankruptcy.


Want to know more?  Here is additional reading:

Five Things To Know Before Co-Signing A Student Loan

Student Loan Borrower Assistance

Consumer Financial Protection Bureau Report on Private Loans



About Mari Adam

Mari Adam, Certified Financial Planner™ has been helping individuals and families chart their financial futures for over twenty-five years. Have a question about your financial situation? Ask Mari!

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