Children are expensive: After they cost you $234,000 in the first 18 years, you then have to consider college. That four-year parting gift will probably cost you at least $10,000 a year for an in-state public school.
"There must be a better way," say most moms and dads. This is when most look to student loans. Like mortgages and car loans, student loans let borrowers buy things today that they can’t afford. Then, they get to repay their loan over a lifetime, a la J. Wellington Wimpy.
The problem is that the borrower, usually an 18-year-old student, not only has no money, they likely have no collateral, no credit history and no credit score. As this isn’t ideal for lenders, lenders created a solution: mom and dad’s collateral, credit histories and credit scores.
Mom and dad co-sign for their children’s student loans, and all is good, right? Not so. There are many risks often overlooked with the hype and excitement of little Jack or Diane going to college.
It affects your credit score
The word "co-signing" sounds innocent enough. It’s something we can all do together. Kumbaya!
The truth is that co-signing for a student loan affects your credit score and your ability to get your own loan. You’re responsible for the amount borrowed, accrued interest, and all fees incurred during repayment. Likewise, if your co-signing buddy happens to miss or be late on their student loan payments, your credit score could drop.
The added concern is that lenders aren’t required to keep co-signers in the loop if there are payment issues. Therefore, you could be the last to know if your student defaults on the loan. By that time, it may be too late for your credit score and credit history.
It’s hard to get off the loan
The lender had you co-sign on the loan because the primary borrower, your student, didn’t have the collateral or credit worthiness to take out the loan themselves. Not until they have an established credit history, a good credit score, and have made 12 to 24 (contingent on the lender) consecutive on-time and in-full student loan payments might you be released from the loan.
Is this possible? Sure. But consider how reliable, responsible, and credit-worthy you were after you graduated school. This brings us to the next point.
You could get stuck with the loan
There are any number of reasons why your student may not be able to repay their student loans. They may not have enough income to make monthly payments easy or possible for them. Or, for the many number of reason people don’t finish college, they too may not finish but still have loans to repay. They, also, could adopt a behavior that many do with their money and avoid paying bills as long as they can.
Your kid’s inability or refusal to make on-time and in-full student loan payments will sink your credit score. While everyone hopes for the best, it’s best to consider the worst.
Their passing could leave you stuck in debt
A risk that’s hard but necessary to consider is the possibility of your student dying before their student loans are paid off. Student loans may not be forgiven in that scenario. As the co-signer, you might be responsible for repaying any outstanding loans.
A solution to this risk is to take out a life insurance policy on the student for the full amount of their student loan. A $50,000 to $100,000 life insurance policy would cost a 25 year old who does not smoke for around $20 per month. Regardless of the solution, this is a risk you should consider, and the sooner the better. Life insurance is generally cheaper the younger a policyholder purchases it.
It could ruin your retirement
Many Americans are struggling to save for retirement. Less than half of baby boomers have $100,000 or less saved for their retirement years. Gen-Xers aren’t faring better.
To sacrifice your retirement for the sake of your child’s college education only puts both you and your child into a precarious situation that may not manifest for years. You know how airline attendants tell us to put on our oxygen mask first before helping others in case of an emergency? Same goes for helping others financially.
If your student doesn’t repay their student loan and the repayment becomes your responsibility, you may be working well into your retirement years, and your kids may even eventually need to support you.
It rewards college for raising tuition
The increasing ubiquity of student loans enables colleges in relentlessly increasing tuitions beyond the rate of inflation. There’s enough blame to go around for the higher education bubble, from increased salaries for top-tier professors and coaches to a growing expectation for upscale amenities and shrinking state budgets.
Many colleges, however, are sitting on billions of dollars in endowment money and hire the best financial advisors to grow those endowments.
Colleges are certainly not hurting for money, but many students and families are hurting to get their slice of the American Dream. The more Americans are willing to extend themselves, the more colleges will increase tuition, as they have since the 1970s.
Reduce your student loan costs
If co-signing for student loans isn’t an option, what options are there? Here are some alternatives to help lower the net cost of college to you and your student.
Be a bottom feeder
College students leave approximately $3 billion in scholarship money on the table annually, but applying for scholarships can be competitive. It’s only competitive if your student competes for the same scholarships everyone else does. Many lower dollar scholarships are never applied for and, therefore, never go towards anyone’s college education. Your student should go for these.
Many employers offer tuition reimbursement for employees. It’s not easy balancing a job and college, but it’s often easier than balancing a student loan budget. Companies with many entry-level positions that will help pay for college include Starbucks, Wells Fargo, Comcast, and more. The added benefit is that your student grows their resume as they study. This will make it easier to get a job upon graduation or move up at their current job.
Keep it simple
Most in-state, public school tuition averages about $10,000 annually. The problem is that most students and many parents want "the best school possible." So does every other student and parent. Due to supply and demand, this is an expensive strategy. Considering the high cost of the best colleges and the tough time graduates are having finding jobs, a less expensive college closer to home may make more sense.
Co-signing for student loans is a serious and long-term commitment, but there are ways to reduce or eliminate the risks of this undertaking. The sooner students and parents consider their risks and solutions, the better for everyone.