Should parents co-sign student loans?

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With the costs of higher education continuing to rise year after year, it is only natural that parents would want to contribute and contribute to the costs. They can do this in a number of ways, the most popular of which is to open a 529 savings account and put money aside however they can. However, parents can – and often do – take out loans to help their dependents complete their undergraduate or graduate studies.

Common borrowing options for parents include Federal Parent PLUS Loans, which have fixed interest rates and are guaranteed by the federal government. However, parents often co-sign private student loans alongside their children, often because students do not have the type of credit required to qualify on their own.

Unfortunately, there are often serious financial consequences that come into play when parents take out loans to pay for their children’s college education. Many of the worst effects aren’t even the result of a defect.

For example, a May 2022 study from the Century Foundation showed that borrowers with Parent PLUS loans whose children graduated owed a median debt of $29,600 at last count. However, the average borrowing parent still owed more than half of the original balance (55%) ten years after their dependent’s graduation, followed by 38% of the original balance 20 years after graduation.

“In other words, many parents spend more years repaying their Parent PLUS loans than the years they spent living with and raising the child whose education was funded by their loan,” noted senior policy associate Peter Granville in an analysis of the study.

There can also be dire consequences for parents who co-sign private student loans with their children – even when the children agree that they will be the ones making the payments once they graduate and start earning real income. . We’ve all heard the stories of college graduates refusing to repay their loans, leaving their parents entirely on the hook. Then there are situations that no one can foresee that put parents and child in a financial bind when neither expects it.

With all of this in mind, you may be wondering if parents should get involved in borrowing for their children’s education. I asked several experts for their opinion on this subject, and here is what they said.

Risks for parents co-signing student loans

Mark Kantrowitz, who is the author of “Who graduated from college? Who doesn’t?and one of the nation’s top student loan experts, says co-signing a child’s student loan is like “giving your child the keys to your financial future.”

When you co-sign, he says, the loan counts as if it were yours because you are a co-borrower. This means that you are also required to repay the debt, just like the student.

Kantrowitz adds that lenders ask for payment from the student first, mostly as a courtesy.

“But, as soon as the student is late with a payment, they will ask the co-signer to make payments,” he says.

If the student is ultimately late with a payment or defaults on their loans, it can ruin the credit of all parties to the loan, both the student and the parents. This is obviously a raw deal for parents, as they may not be aware of late student loan payments until it happens and the damage is already done.

Michael Lux of The Student Loan Sherpa also adds that not everyone completes college in the first place and others cannot find a job after graduation that pays enough to meet loan bills. student. This can leave parents on the hook for full or partial payments for years, and all at a time when they’re likely trying to save for retirement or enjoy their golden years.

Then there are the unpredictable issues that can arise, including disability or major health issues that can make it difficult or impossible for the new grad to earn an income.

“Even if your child is doing everything right, if they are injured in an accident and unable to work, the parent may have to pick up the payments,” says Lux.

Bruce Hanson, educational well-being expert and founder of First Choice Admissions, also adds that it’s important to consider whether a child’s inability to repay the loan could harm the parent-child relationship.

“How much financial damage would this cause to your household?” ” he asks. “Imagine the conversations that would spark. Would your relationship survive it? »

Hanson says her own parents were instrumental in helping her finish her program at Wharton and they had a much better relationship once the loans were paid off.

Ultimately, he says you need to have an uncomfortable conversation with your child now so that you both understand the possible outcomes and are sure you can work through them together.

If that kind of conversation seems impossible, that’s a good sign that co-signing on student loans is a really bad idea.

Pay for college without co-signing

Kanrtowitz says taking out Parent PLUS loans can be advantageous over co-signing a student loan since the parent is the only listed borrower and can ensure that all payments are made on time.

The parent can then sign an agreement with their child for the child to send the payments to the parent, he says. “It should be a formal agreement, a contract, so there’s no question of the parental loan being a gift.”

It is also a good idea to make sure that the student exhausts all efforts to find free money for college first. For example, Kantrowitz recommends searching for scholarships using a free scholarship matching website like Fastweb.com or the College Board’s Big Future.

That said, families should begin the process of finding money for college by completing the Free Application for Federal Student Aid (FAFSA). Filing this form lets each family know what kind of student aid they may be eligible for, including federal student loans.

Speaking of which, parents should also make sure their child borrows first using federal student loans in their own name. After all, federal student loans come with fixed interest rates and are eligible for income-driven repayment plans and federal protections like deferment and forbearance.

Of course, federal student loans have strict borrowing limits, which borrowers can easily exceed. However, Kantrowitz points out that hitting those borrowing limits is a good reason to stop and think about what you’re doing before borrowing more.

“If the student needs more money, it may be a sign that they are borrowing too much and should enroll in a lower-cost college or save in some other way,” he says.

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