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As the cost of college rises, more parents are cosigning private loans for their children’s education.
That move can wreak havoc on older people’s financial lives if their child struggles to repay the debt.
Some 45% of adults over 50 who took on education-related debt for someone else did so in the form of cosigning a private loan, according to a new survey by AARP, an advocacy group for older Americans.
Cosigning a loan, in which a person with good credit essentially promises to repay the debt if the primary borrower fails to do so, was the most common way people went into education debt for someone else (usually a child, although sometimes a grandchild or spouse).
“Parents want to provide the best education possible for their child,” said Lori Trawinski, director of banking and finance at AARP’s Public Policy Institute. “Many times they’ll take any action they can to help their kid.”
Once students have exhausted their federal student loans, it can be hard to get a private loan without a cosigner. Around 90% of private student loans to undergraduate students require one, according to Mark Kantrowitz, the publisher of SavingForCollege.com.
“I think cosigned loans should come with a black box warning label,” he said. “Cosigning a student loan may be hazardous to your wealth.”
What am I signing up for by cosigning?
“Some people, incorrectly, believe cosigning to be like giving a reference,” Kantrowitz, said. “In fact, a cosigner is a co-borrower, equally obligated to repay the debt.”
That means that if your child falls behind on his or her student loan bill, or goes into default, both of your credit scores will take a hit. (A private student loan can go into default after 120 days.)
Even if your child is in good standing on the loans, your credit will be impacted, said Elaine Griffin Rubin, senior contributor and communications specialist at Edvisors, a financial aid site.
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It could be harder for you to secure another loan or refinance your house, since lenders will take your existing debt into account when considering an application.
Some private student loans don’t come with a “death discharge,” meaning you’ll still be responsible for the debt if your child passes away.
In some cases, lenders will release a cosigner after the student has graduated and picked up employment.
What are my other options?
In most cases, parents are better off taking out a parent PLUS loan from the government than cosigning a private loan for their child, Kantrowitz said. Even though the loan is in your name, you can make a side agreement with your child that he or she will repay it.
“That way, the parent remains in control and can make the payments if the student doesn’t,” Kantrowitz said.
Even so, there’s risk involved. “If the student is irresponsible, it makes for very awkward holiday dinner conversations.”
If you do end up cosigning a loan for your child, Griffin Rubin said, there’s usually a way for you to access an account in which you can keep tabs on the debt.
Perhaps the bigger point? If your child has exhausted their own federal student loans, and needs to take out private loans, there’s a good chance they’re borrowing too much, Kantrowitz said.
“They should consider a less expensive college,” he said.