College is increasingly expensive, and long gone are the days when students could pay their college expenses with the earnings from a summer job. More and more students are relying on loans to pay for college, and many of those are private student loans, which are not funded or subsidized by the federal government. Parents and grandparents who want to help a student get through college may consider co-signing on a private student loan. This can be a real benefit to a young person who doesn't have a long credit history, or a strong one. Because the co-signer's credit history is taken into account on the loan application, having a co-signer with a solid credit history can bolster a student's chance of getting a loan, or getting one with more favorable terms.
It might seem like a no-brainer. Your child or grandchild needs help, your signature can get them that help. Why would you withhold that assistance? You don't need to, but you should make the decision to co-sign on a student loan with your eyes wide open. Let's look at some of the risks you should consider.
The bottom line is that co-signing for a loan of any type puts makes you responsible for repaying the loan if the primary borrower can't keep up with payments. No matter how unlikely you imagine that scenario to be, you need to be completely comfortable with the idea that you are on the hook legally, and that it is a very difficult hook to remove yourself from.
It can be a painful hook, as well. Let's say your student takes out $75,000 in private loans, which is not an outrageous amount—many students graduate with double that much debt. If the interest rate is 5% (and it could well be more) and the repayment period is ten years, the monthly payment will be $795.49. If you are on a fixed income, or don't have an extra $800 per month lying around, you may not want to risk co-signing for that loan.
What's more, if your student defaults on their loan, and you can't make the payments, then your inability to pay could destroy YOUR credit and expose you to the tactics of aggressive debt collectors. Not the way you want to spend your golden years, if you are already retired, and certainly not how you want to prepare for retirement if that is on the horizon.
With all that could go wrong if you co-sign on a student loan for your child or grandchild, the next step is to consider whether the boost your signature would give their application is worth the risk that it would involve.
Given the risks described above, you might not want to consider co-signing a loan for your grandchild or child unless the benefit of doing so is great. You might assume that as an older person with more income and a stronger financial background, your signature as co-signer would be invaluable. But will it?
The primary reasons for co-signing are to boost the likelihood that the loan application will be approved and to secure the lowest possible interest rate or other favorable terms. However, an older co-signer, especially a grandparent who is retired, may not be able to help a student achieve these goals.
The primary reason for having someone co-sign a loan is to boost the likelihood that the loan application will be approved. The other reason is to try to secure the lowest possible interest rate or other favorable terms on the loan.
However, an older co-signer, especially a grandparent who is retired, may not be able to help a student achieve these goals. If you are living on a fixed income or are no longer working, you may not be able to make the loan payments in the event the primary borrower defaults. If that is the case, your signature on the application as a co-signer may not increase the chances of acceptance or favorable terms very much at all.
Likewise, just because you're older doesn't mean your credit history is in great shape. If it's not, co-signing on a student loan probably won't help your student, and may even hurt them.
After all this analysis, you may still decide that you want to co-sign on your student's loan. If you do, you should take every possible measure to protect yourself. The first and most obvious step is to read everything you plan to sign, including (especially) the fine print.
Don't assume you know what constitutes a default. In fact, the definition of that important term may vary among lenders. Likewise, consider, if the primary borrower does default, what actions the lender might be able to take against you. Envision scenarios that might occur. What if the primary borrower dies, becomes disabled, or needs to file bankruptcy? What if you do? Be aware that most student loans are not dischargeable in bankruptcy. Another factor many people fail to consider is whether there are any penalties for prepayment of the loan. Look specifically for this information and ask about it if anything is unclear.
Last, but most certainly not least, do not feel pressured into co-signing for a loan if you are not completely comfortable doing so. Putting yourself at risk of debt to try to help a loved one have a promising future makes no sense, and in fact sets a bad financial example. Consult your attorney or financial planner to discuss ways that you can help a child or grandchild without jeopardizing your own future.
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