Should You Cosign a Student Loan for Your Grandchild?
As a grandparent, you want to do everything you can to help your grandchild succeed. That’s the reason your grandchildren might turn to you for financial help when it comes to paying for college. If you don’t have the funds outright to contribute to their education, you could be asked to cosign a private student loan.
But, should you do it?
The Consumer Financial Protection Bureau reported in January 2017 that the number of consumers ages 60 and older who have student loan debt has quadrupled to 2.8 million over a decade ending in 2015. That can be particularly burdensome for people who are on a fixed income due to retirement.
Here are some things to consider before cosigning a private student loan for your grandchild.
1. You’ll have to pay if they can’t
Signing your name on a loan for your grandchildren might seem like an easy way to help them get the money they need for college. But you could face serious ramifications if they can’t pay it back.
Even though your grandchild is the primary borrower, you’re a cosigner, so you’re obligated to repay the debt if your grandchild can’t. The lender will come after you for repayment as soon as your grandchild is late on a payment.
It could be more than just covering a couple of missed payments on your grandchild’s behalf. You’re technically on the hook to pay back the entire loan amount if your grandchild can’t. And one missed payment makes the loan delinquent.
That’s why it’s important to have a conversation about the responsibilities of repayment before cosigning a loan and to consider if you’re able and willing to take on the risk.
2. Cosigning could hurt your retirement plan
You’ve spent your whole life building a nest egg so you can enjoy your golden years. Cosigning a loan could damage your retirement goals. One of the major reasons has to do with your debt-to-income ratio (DTI).
Even if you grandchild pays the loan on schedule, the remaining debt will be on your credit report. So if you need to get a loan for a car, buy something major for your home, or refinance your house, you might not be able to qualify easily or you could face higher interest rates.
It’s important to note that private lenders can’t go after things such as your Social Security. If you’re on a fixed income from retirement, a loan might be the only way to handle affording any major unforeseen expenses, and lenders could consider your DTI ratio when approving a loan and determining an interest rate. With this in mind, make sure you feel financially solid about your retirement before you cosign that loan.
3. Unpaid debt can snowball
Say you were smart and reviewed exactly what’s owed and when on your grandchild’s student loan, and you feel confident they can pay. It’s important to remember that debt can snowball.
Even if you grandchild misses even a couple of payments, the debt can increase quickly, leaving you on the hook for more than you anticipated. Every time a payment is missed, late fees, accrued interest, and even collection costs can accumulate, making the original amount you agreed to cosign balloon.
Again, this can put you in a risky financial situation, especially if you’re on a fixed income. So be sure you can afford to cover the monthly payments if you grandchild is unable to.
4. Bankruptcy won’t save you from repaying student loans
While no one wants to file for bankruptcy, you might consider it as a last resort if neither you nor your grandchild can repay the loan. Unfortunately, it’s difficult to discharge a private student loan in bankruptcy.
It’s possible to do it, but you’d have to go through the hassle of going to court to prove excessive financial hardship. That would mean you’d have to meet the requirements of the Brunner test, which include proving poverty, persistence (meaning finances aren’t likely to change), and good faith (you’ve tried every way to pay the loan).
In some states, private lenders can argue for garnishment from your wages or bank account to pay back the debt. So, you could end up losing part of your retirement anyway in addition to paying court fees. That’s why it’s important to think about the worst-case scenario before cosigning a loan, so you’re prepared financially if that were to happen.
5. Cosigning student loan could damage your relationship
In addition to all the financial ramifications you could face by cosigning your grandchild’s student loan, there are some emotional ones to consider as well. Even if you have a great and trusting relationship with your grandchildren, getting finances involved could put a strain on your relationship, especially if the repayment doesn’t go as planned.
Be sure to ask yourself if it’s a risk you’re willing to take. Your grandchild might not be able to get a loan without your help, but cosigning could put a different pressure on the two of you. It’s a factor that needs strong consideration and conversation.
Cosigning your grandchild’s loan is a major decisionBeing able to help your grandchild pay for college is a great way to set them up for a successful future. That’s why cosigning might be the right choice for grandparents who have enough in savings or make enough money to support others. If you fall into one of these buckets, you won’t be as stressed financially if your grandchild suddenly can’t pay.
If you rely on a set income, though, you might feel it’s best to tell your grandchild you can’t cosign. But there are some ways to deliver the news gently.
First, it’s best to be candid. If you explain your financial situation and why cosigning doesn’t make sense for both of you, they’re likely to understand and prevent the relationship from straining.
Even if you’re not feeling comfortable cosigning, it doesn’t mean you can’t offer support in other ways. Perhaps you can give them some money to buy books or you could spend time in helping them find scholarship opportunities. You can also look at ways for your grandchildren to get money for college without a cosigner.
These gestures can go a long way to protect your retirement goals and relationship with your grandchild.
Jordi Lippe-McGraw has been a lifestyle writer/editor for almost a decade covering everything from breaking news to diet, fitness, entertainment and travel features. Her writing has appeared in various outlets including Condé Nast Traveler, Travel + Leisure, TODAY.com, Yahoo Travel, Ocean Drive, Gotham, Hamptons, New York Post, Huffington Post, Oyster.com and many more. I’m also a regular on numerous talk shows and news programs such as Wendy Williams, MSNBC and the Today Show.
She also started a website –Well Traveler – where she shares beautiful and practical stories from her travels, inspiring people to embrace their individual journeys and learn simple steps towards creating a happy and healthy life. In addition, she obtained her Holistic Health Coach certification through the Institute of Integrative Nutrition and the American Association of Drugless Practitioners.
Prior to going freelance and starting her own company, she was the Entertainment Director for Life & Style, In Touch and Closer Weekly for six years.