Parent who co-signs on child’s private student loans, be aware! It is not always the good kind of debt.

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News | by — August 11, 2014

I read an interesting article recently, cautioning parents about the hazards of co-signing on private student loans for your children.  It is advice worth repeating, to try and counter the strong pull all parents feel to help their child with their education.

In our law practice it is something that we frequently find ourselves counseling people against.  Yet, as parents, we understand the difficulty in heeding such advice.

As my children have grown up over the past decade I have found myself pushing the same mantra on them over and over in a variety of ways: “you need to obtain a college degree.  The investment is necessary and well worth it.”  I suppose that sounds more like a truism than anything; it certainly is true that college graduates earn significantly more money over their lifetime.

This sentiment though can gloss over the increasingly harsh reality of student loan debt.  Our society tends to encourage the taking on of student loan debt; I think due to an underlying belief that an investment in education is always going to pay off.

Today, however, total student debt nationwide is at about $1.2 trillion dollars, a number significantly larger than total credit card debt in this country.  The rate of young adults who fail to pay on their student loans within three years of leaving school is now at about 15%.  So, all parents should understand when they are signing on the dotted line, that there is a chance their child will be unable to pay back their student loan.  In that case, the lender will turn to the parent co-signor.

Private student loans are particularly risky for the borrower, and co-signor, who can’t make the monthly payments.   There are numerous reasons for parents to think twice, maybe three times, before ever agreeing to co-sign on a private student loan for their child.  First, private student loans typically charge a higher interest rate, which significantly increases the cost of the loans.  Second, private student loan lenders do not have to provide the same options to struggling borrowers as federal student loan lenders do.  Third, the disability or death of the child does not eliminate the obligation of the co-signor to pay back the loan in full.  Fourth, as with federal student loans, the debt cannot typically be discharged (with some exceptions) in bankruptcy by either the child or the parent.

It isn’t that we think it is never a good idea to co-sign for a child’s private student loan.  Yet, from the experiences we have seen past clients through, we strongly encourage any parent to consider the kind of hardships they may experience if the bank turns to them in the future for repayment of that loan.

Interested in speaking with Tim or Michelle about your situation? Contact us for a free consultation.

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