Why parents should take a 'big pause' before co-signing that student loan
Posted August 25, 2016
You may want to stare down the puppy dog eyes of a pleading son or daughter to cosign their student loan so they can get a better interest rate, the New York Times suggests in a back to school primer for parents. There are some obvious advantages, but things can get complicated very quickly.
Students who max out their financial federal aid and turn to private lenders will often end up considering getting a cosigner. The Times cites a survey by MeasureOne of the six largest lenders, reporting that in 2015-16 "94 percent of new undergraduate private loans had a co-signer, while 61 percent of graduate school loans did."
Complications with cosigning loans include what happens if the primary borrower or the cosigner dies? Hint, the other party is still on the hook, and getting bankruptcy relief for student loans is an enormous hurdle.
One Pro Publica report this summer from New Jersey told the story of a mother who was still on the hook for her son's loans even after he had been murdered. And a child whose parental cosigner dies will often be hit with a demand for repaying the entire loan. In addition, parents may find that their own ability to borrow has been limited by the loan, even if the child makes repayments on time.
Financial experts lean heavily against cosigning any loans, whether for cars or classes. Syndicated columnist Michelle Singletary offered one simple rule last week: "Unless it's for your spouse, don't do it."
But many parents haven't gotten the word. A Creditcards.com survey of 2003 American adults this summer found that one in six had cosigned a loan or credit card, most commonly helping a child buy a car.
The survey found that "38 percent of co-signers had to pay some or all of the loan or credit card bill because the primary borrower did not, while "28 percent experienced a drop in their credit score because the person they co-signed for paid late or not at all," and "26 percent of respondents said the co-signing experience damaged the relationship with the person they co-signed for."
Overall, the poll found, 1 in 6 U.S. adults say they have co-signed a loan or credit card for someone else. The most-common scenario: A co-signer older than 50, helping a child or stepchild by co-signing an auto loan.