Parent, I urge you: DO NOT cosign a student loan for your child.
Today I’m featuring information from an article by nationally syndicated radio host and author Clark Howard. I consider this to be must-read info for every parent. After you read below, you can find articles by Clark Howard, listen to his radio show, view his videos, and sign up to receive his money-saving advice right in your email inbox at ClarkHoward.com.
Are you considering cosigning a loan for an adult child who needs a car, a student loan, or a credit card?
Here are 7 deeply concerning things you need to be aware of before you pick up that pen.
1. If you cosign a student loan, you may unwittingly strain future family relationships.
Nobody likes to think about this, but there’s an almost four in 10 chance that when you cosign a student loan, you will be the one who has to pay off the balance. A CreditCards.com survey found that of the cosigners they surveyed, 38 percent had to pay some or all of the loan balance or credit card bill because the primary borrower did not, 28 percent experienced a drop in their credit score because the person they chose to cosign for paid late or not at all, and 26 percent said the cosigning experience damaged their relationship with the person they cosigned for.
Are you ready for the relationship fallout you might experience down the road — if your son or daughter stops paying on the obligation? Remember, their debt will have your name written all over it until the day it’s paid in full.
2. When you share your child’s debt by cosigning on student loans or taking out Parent PLUS loans, you risk having your future social security checks garnished until the balances on those loans are paid in full.
This could leave you, the parent, in poverty during your retirement years. I am not kidding. Read the important article I (Jeannie) wrote on this subject, here.
3. Your untimely passing could throw a child you love into immediate default.
Private student loans commonly contain a clause that allows the lender to call the loan due in full if you as a co-signer die or declare bankruptcy.
The Consumer Financial Protection Bureau is recommending that people with private student loans try to get a release for their cosigner before something like this happens. They have a series of sample letters to help you get the job done.
4. You’ll have to be organized enough to keep track of every one of the payments.
This Bankrate article on Top 10 Reasons Not to Cosign puts it this way: “Think it’s hard enough to keep track of all of your own bills and payments? Well, if you cosign, you’ll also need to keep track of someone else’s bills and payments. This will mean checking each month (either online or by calling customer service) to make sure the payment has been made. You can’t blindly believe that all the payments will be made. Don’t wait until some debt collector calls you saying payments have not been made in six months. By then, your credit will have already been damaged.”
5. If you cosign a student loan, you’ll raise your debt-to-income ratio, potentially damaging your credit rating.
This can cause you untold headache in the event that you need to apply for a mortgage for yourself on down the line.
6. If your child leaves behind private student loan debt after perishing in a car accident or dying of cancer, lenders will come after you for the money.
This is the last thing you want to have happen while you are grieving tragic loss.
7. Cosigning student loans is so prevalent today that you may feel intense pressure from your child’s college to “just go ahead and do it.”
According to a report by the Consumer Financial Protection Bureau and the Department of Education, about 90 percent of all private student loans are co-signed by a parent. Sadly, a 2014 Citizens Financial Group survey revealed that 94 percent of parents with a child in college said they felt burdened due to their children’s college loans. In addition, 50 percent of parents surveyed did not have a plan to repay their child’s student loan debt.
Resist the urge. Cosigning is a hazard that should be avoided if at all possible. Having your child start college life at a low-cost community college near home is far preferable to you having to cosign a student loan.
If you are determined that you will cosign a student loan anyway, here’s what you can do to try to protect yourself:
You may be able to negotiate the terms of cosigning beforehand.
The Federal Trade Commission suggests that you try to get the following language into the loan contract: “The co-signer will be responsible only for the principal balance on this loan at the time of default.” This means you won’t be responsible for exorbitant penalties, late fees, or court costs if you’re sued over the debt because the borrower is not paying as agreed.
It may be possible to remove yourself as a cosigner.
With private student loans, you may be eligible for a cosigner release once the person you signed for makes a certain number of consecutive on-time payments and completes a credit check. But you’ll likely have to insistently and proactively “beat down the door” of the student loan servicer in order to make this happen.
With an auto loan, you can sometimes get off as a cosigner if the person you signed for refinances the loan in his or her own name.
Dive full-speed ahead into paying the loan off, yourself, as fast as you can.
The resources at DaveRamsey.com will help you with this. Remember, if you pay your daughter’s loan off early, she can still fulfill her obligation to you by making payments directly to you.
If you do ever cosign a student loan, make it a one-time only thing, and treat the money as a gift.
If you treat the loan money as a one-time only gift and you do actually get paid back, that will be a happy surprise.
Parents, I urge you to plan ahead and avoid student loans altogether.
For clear, step-by-step help getting your kids through college debt-free without applying for hundreds of scholarships, get your copy of my book:
You can “Look Inside” the book on Amazon for free by going to:
(Tell your friends.)
You can see the “Top 9 Questions Parents Are Asking Me About LAUNCH,” here.
Read just one chapter of LAUNCH every 1-3 months while your child’s in middle school and high school, and you’ll know every viable strategy for debt-free college at exactly the right time to implement it.
And if your child’s already well past middle school? That’s OK; you can run to catch up. But the process of getting your kids through college debt-free goes more smoothly the earlier you start it – especially if you’re not planning to save up any money to pay for college.
Do you have friends who are parenting kids ages 12 – 22? SHARE this post on Facebook, Twitter, and LinkedIn right now.
What about you? What are your stories about cosigning on student loans? Comment below or LIKE Jeannie Burlowski Author on Facebook, find this post on that page, and let’s talk about it there.
Who is Jeannie Burlowski?
Jeannie is a full-time academic strategist, author, speaker, and podcast host. Her writing, speaking, and podcasting help parents set their kids up to graduate college debt-free and move directly into careers they excel at and love. Her work has been featured in publications such as The Huffington Post, USA Today, NerdWallet, and US News and World Report, and on CBS News.