In the United States, it may seem impossible to be a student without student loans. Even state college tuition can costs tens of thousands of dollars, while private college tuition at some top schools has reached $50,000 a year or more. With college costing so much, it should come as no surprise that research indicates as many as one out of every five U.S. households are carrying student debt.
Since student loans have become a fact of life, many parents are now faced with an important question: Should I cosign student loans for my kids? College students often have little credit history, and they turn to parents, relatives, or even friends to cosign so they can get the most favorable loan rates.
However, before you agree to cosign a student loan for your kids or anyone else, there are some important considerations to think about.
Cosigning Student Loans: A Major Risk
Cosigning is always risky because you assume joint responsibility for the entire amount of student loan debt. In other words, you are 100% responsible for the loan you cosign for, even if your son or daughter is the one who is actually getting the money to go to school. If your son or daughter can’t pay or doesn’t pay for any reason, the bill will fall to you.
When you cosign a student loan, you take on even more risk than you do when guaranteeing other types of debt because the law treats student loans differently:
- Student Loans Can’t Be Discharged in Bankruptcy. Except in very special circumstances, there is no way to get rid of student loan debt except by paying it off.
- Student Loan Lenders Can Garnish Social Security. This can put the security of your retirement at risk.
- Lenders Can Seize Tax Refunds. This money is taken directly from your tax refund check for defaulted government loans.
- Lenders Are Increasingly Using Private Debt Collectors. Debt collectors can track you down using public records, and are often very aggressive in collection efforts.
- Federal Student Loans Have No Statute of Limitations. Unlike other debts, which become void after seven years, debt collectors can pursue you indefinitely for unpaid student loans.
Because of these special rules, debt collectors recover approximately $0.80 on the dollar for defaulted student loan debt as compared to $0.20 on the dollar for unpaid credit cards.
What to Consider Before You Cosign
The special debt collection rules should give you pause if you are considering cosigning for student loans, as the debt could burden you for the rest of your life.
- Your Children May Be Unable to Pay. Even if your kids have the best of intentions, some students are simply unable to get jobs that pay enough for them to repay their loans. Before you cosign a student loan, consider whether the degree your child is getting could actually lead to a career that will give him or her an income to pay back the loan.
- If Something Happens to Your Kids, You Could Be Left With the Bill. No parent likes to think about something happening to their children, but unfortunately accidents and illnesses do occur. If your child is severely disabled or suffers an untimely death, you could be left with unpaid student debt on top of everything else.
- Your Retirement Is at Risk. Wanting to help your children is noble, but there are no loans to get you through retirement. You need to take care of your future as well, and that means putting a significant amount of money into your retirement savings.
- Cosigning a Student Loan Requires a Long Commitment. With graduated payment programs and lengthy repayment periods, it is not unusual for people to carry a student loan balance for decades. This means that cosigning a student loan could be a 25- to 30-year commitment on your part.
- Cosigning a Student Loan Can Create Family Strife. While you may want to help your kids, you also put stress on the relationship by mixing your money. What will happen to your relationship if your kids don’t pay back the loan as promised?
- Cosigning Can Damage Your Credit. If your child is late in making payments, this can show up on your credit report and damage your credit score. Even if your child does make payments on time, the required monthly payments will show up on your credit report as an obligation. This can affect your debt-to-income ratio and debt-to-credit ratio, and when creditors see you owe this money, it can become harder for you to get a mortgage or car loan if you need one.
Before you cosign a loan, be sure to understand the implications of all of these issues. You should sit down with your child and have a serious discussion about the importance of the decision you are making. Many students don’t fully understand the debt burden they take on when they go to college, and you need to make a joint family decision that your son or daughter is truly ready to take on the responsibility associated with getting a degree and going into debt.
Consider the Type of Student Loan
Another final question that you need to ask before cosigning for a loan is, “What type of loan is my child taking?” To qualify for federal student loans, students usually don’t need cosigners, as these types of loans are specifically targeted toward college kids. In many cases, however, your child will need you to cosign a private loan.
Private loans may have higher interest rates than federal student loans. They may also have limited options for repayment, and may not offer the flexibility of being able to defer payment, put loans into forbearance, or make payments based on monthly income. If your child is taking on private loans, be sure you’ve researched all other options for federal aid first, and be sure you have full details about the lender and the terms of the loan. If you c0sign, you take responsibility for this private debt. Therefore, it is especially important to do the necessary research.
While it may seem like good parenting to be willing to cosign student loans for your children, you need to make sure you are making smart choices for yourself as well – with special consideration given to your elder years when you are no longer able to work. If you decide that cosigning is not right for you, there are plenty of ways you can help out your child, including assisting in researching loan alternatives, scholarships, and other financial aid options. Don’t ever feel pressured to make a decision so important to your financial future unless you are prepared to accept that circumstances might result in you paying the bill.
Have you ever cosigned a student loan for your children?