Beware Co-signing a Student Loan
Co-signing a Student Loan Could Ruin Your Retirement
This is one aspect of parenting that has many opinions and heated discussions. Let’s say that your child or grandchild just finished high school and has been accepted by their favorite college. Unfortunately, some part of their borrowing will require co-signing a student loan with a private lender.
Like many other students who apply for financial aid, the federal government will approve loans directly to the student. This is done without as much as a credit check. But, many times the federal government approval doesn’t cover all of the costs and the student must apply to the private student loan lenders.
These loans do require a credit history check, and the young student usually doesn’t qualify. The first thing the lender suggests is a qualified co-signer. The excited student now comes to the parents or grandparents for help.
When the request is made for a co-signer, many parents and grandparents don’t fully understand the potential consequences. They want to help the young person get a good college education and quickly agree to co-sign.
Even if the student borrower makes the loan payments, the credit score of the co-signer is affected. Just by adding your name to the student’s loan, you have added that loan amount to your own record. This will also have a negative effect on your credit score.
A survey was done a couple of years ago to find out the impact to parents and grandparents by co-signing a student loan. In general, many of these co-signers were hurt financially as a result of their action.
Following are some of the results of this survey.
- Over 56% of the co-signers reported a negative effect on their credit score. The reason for that is obvious. If the student makes a payment late, this is reported on his credit report and also the co-signer who may not be even aware of it.
- In addition to that, the total amount of loans that you co-sign is added to your total debt when you apply for a loan yourself.
- Over 57% of the co-signers were asked by the students to help them make the loan payments. This has hurt many parents and grandparents who were trying to save for their retirement. If help was not given, loans would become in default and then the problems would really mount.
- About one third of the co-signers reported that they had difficulty in obtaining a mortgage or an auto loan because of co-signed debt.
- By bailing out the child, over one half stated that their retirement savings was reduced. Even worse, some parents had to make early withdrawals from retirement accounts to repay these private loans.
- About a third of the parents said that they didn’t understand the risks of co-signing a loan.
A recent estimate revealed that approximately $120 billion in co-signed private student loans is outstanding in the USA. Over a million students each year borrow from private lenders and over 90% of them are co-signed.
A second poll was made of college students to determine their thoughts on having their student loans forgiven. About half thought they would qualify for some portion of their debt to be forgiven after they graduate. Even if that is true, to qualify, they are required to make 120 payments on time. Sadly, there are some who graduate with a degree and can’t find a job in that degree career field.
Many graduating students are stressed out worrying how they will be able to repay these student loans. Others have considered second jobs to be able to repay these loans and most have said that until their loans are paid off, they will postpone saving for retirement.
Parents and grandparents, there is a student loan crisis and it is not getting any better. If you are being asked about co-signing a student loan, or any other type of loans, give it very serious consideration. If the primary borrower fails to repay the loan, you will be called upon to pay it.
Before co-signing a student loan, be very sure that you can afford to make the payments. You could be already in retirement when that letter from the bank arrives demanding full repayment and literally ruins your retirement plans.
Gust Lenglet is the CEO of HBS Financial Group, Ltd., an accounting & tax preparation firm in Maryland. He has more than 25 years of experience in the banking and financial industry. Gust started his career as a loan officer at a major national bank, and then moved on to become controller of a major law firm. In recent years, he has written many financial articles that have been published on Ezine Articles and many websites.