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.
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8 responses to “Beware Co-signing a Student Loan”
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Gust Lenglet – Platinum Author
Wow, I learn more every day from this blog. It is hard enough to get into college and now it’s hard to pay for it as well. Anyway, I am quite sure that despite all these disadvantages, parents and grandparents most definitely want their kids to get the best education they can ask for. I, for one, would cut my losses in order for my baby to go to a good school.
Thanks Alison. We all need to be careful when asked to co-sign a student loan. Sometimes there may be another alternative.
Do you have any suggestions on how to avoid having to co-sign a loan? Are there other options for students and their families?
Thanks for your comment Ashlyn. This topic is a very “hot potato” in any family discussion. The student needs to get all government loans available and if a private loan is necessary, it has to be done. However, any one who is going to be a co-signer must be aware of the consequences and liability. The co-signer must advise the bank that he/she will be advised if the student’s loan is past due for a certain number of days. NEVER depend on the student to tell you. At least the co-signer can make the payment if necessary before the entire loan balance is demanded.
That’s what I went with when my daughter went to college. In her case I’m not worried that co-signing a student loan will negatively affect my credit score. My daughter will be joining the family business after graduating so I look at it as an investment. Too bad that’s not always the case.
Parents usually don’t have a choice when having to co-sign for a child’s loan. Where a problem usually develops, is when a grand parent is asked to co-sign a loan, and are living in retirement. They usually aren’t aware when a loan is delinquent, and can get stung big time, when they get a letter from the lender, demanding repayment in full. It can ruin a retirement very quickly.
Exactly. I’ve seen the consequences of this action, but it wasn’t me. My great aunt did the same thing and when her daughter couldn’t get a job to pay up, she was served the paper and had to pay everything from her retirement savings! I actually felt sorry for her but she really didn’t know the implication. Thanks for this and I’m definitely sharing this page so people can understand and see what they are getting into.
Thanks for sharing Elena. Its bad enough when a parent co-signs a student loan, but quite often, a grandparent already in retirement, co-signs and doesn’t have a clue that the loan is in default until that certified letter arrives, demanding full payment on the loan.