Think twice before co-signing that student loan

Sure, we love our kids. Of course we want them to get ahead. So when your son, daughter, or nephew asks for your signature right next to theirs on that private student loan application, it is tempting. But before you sign on the dotted line, consider this.

When you consent to being a student loan co-signer you are in for the life of the loan. If the student fails to make payments, you must. If they are late, you get the notices too. Their financial problems will impact your credit score and could haunt you the next time you apply for a car loan, home mortgage, or simply a credit card. 

I know that putting aside your emotions is difficult at best in the decision-making process. Yet you must, because there is real money on the line as well as a multi-year financial commitment. Approach the decision as if the relative were a potential business partner. As such, you must be a fairly good judge of character. Does the person asking for the loan follow through on his or her commitments? Do they have a history of making good financial decisions or just can’t seem to save money? How practical are they in life’s decisions?

If the answers still indicate a green light, decide how and when they are going to be able to pay back the loan. If your son is insisting on getting an art degree with absolutely no prospects of employment, co-signing a loan with him could be financial suicide. Today, many college grads who have a degree in occupations that are already over-employed, obsolete or pay minimum wages cannot repay their student loans. Just because your relatives are “following their hearts” in acquiring a degree is no reason to support that decision financially. 

By all means be supportive, but at the same time, the best assistance you can give is to explain the realities of the workplace. It is their option to listen and agree or disagree. Do this before the student racks up thousands of dollars of debt that will follow him or her for the rest of their life and possibly yours.

If after all this the decision is still a go, then urge the student to first explore a federal student loan, which does not require a co-signer, whereas 90 percent of private student loans do. Federal Stafford Loans for undergrads have a fixed rate of 4.66 percent if the student loan is taken between July 1 and June 30, 2015. This would be the best option for both the student and you.

But if you are still not convinced or the private loan is still the only option, then consider also that the amount borrowed is not the amount you will end up repaying. Deferment, forbearance and interest will add a substantial sum to that debt. Remember too that student loans are not subject to bankruptcy laws. It is nearly impossible to have student loans discharged. And don’t think you can remove yourself from the loan once the student receives it. Lenders have a whole host of hoops you need to jump through to even consider removing you from the loan. 

To be fair, only 7 percent or so of students actually fail to make good on their loans. In most cases, the student pays on time and things go smoothly. It is only when they miss payments and the bank comes to you that your relationship begins to change with the co-signee. It is you who will be the “bad guy” every month in hounding the student to make their payments on time. What was once a warm and affectionate relationship can quickly evolve into something else. Don’t let that happen to you.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.