Last summer Steve Mason, a senior pastor at Oasis Church in Redlands, California, gained national attention after inheriting his deceased daughter's student loan debt. Mr. Mason's daughter Lisa died suddenly of liver failure shortly after graduating nursing school, leaving him liable for the $200,000 in student loans he had cosigned to finance her education. The Mason family exhausted all of its options, including depletion of both Steven and his wife Darnelle's retirement funds, and loan forbearance relief. Rising levels of student loan debt weigh heavily on Millennials and parents alike, as many parents find themselves liable for their child's student loans.
Steve Mason's tragic story may be an extreme case, but he is not alone. Millions of people are legally obligated to have a portion of their wages diverted to paying down student debt. Borrowers and their parents seemingly have nowhere to turn when they are unable to repay the student loans they are liable for. Unlike most forms of consumer debt, student loans cannot easily be discharged through bankruptcy.
While there are risks involved in co-signing your child's student loans, there are a number of benefits for the borrower. Co-signing can increase your child's chance of approval, and can help them qualify for a better interest rate. In order to help minimize the risks involved, we've compiled a few tips to consider before co-signing your child's student loans:
If you have never cosigned a student loan before:
- Stay involved at every step: Go through the loan application processes with your child and make sure you both understand the terms and benefits offered by various lenders before co-signing. Keep copies of all loan documents and have a clear understanding of your responsibilities as a co-signer from the start.
- Sign a family agreement: Have a discussion with your child about the repayment process and get them thinking about how they will make their monthly payments after graduating. It may even be helpful to sign an agreement with them stipulating that they agree to make each monthly payment on time for the life of the loan.
- Never dip into retirement: Your financial stability in your later years is dependent on what you set aside now. Keep your future secure, and help your child explore repayment options that do not involve your retirement portfolio.
- Consider a co-signer release: There are certain lenders who allow for cosigners to be released from their loan obligation after the borrower makes a fixed number of on-time repayments (usually after graduation). Be sure to examine what co-signer benefits are available to you before signing.
- Get insured: Consider taking out a life insurance policy on your child. This will prevent you and your family from shouldering the burden of repayment in case something happens. Make sure that the beneficiary on the life insurance policy is the person co-signing the loan.
- Make timely monthly payments: Ensure the loan balance never exceeds the principal loan amount. In the long run, potentially annoying your child with reminder text messages or voicemails is better than a late payment that harms your both of your credit scores.
- Consider letting your child live at home: Help your child out with unrelated expenses, but keep them responsible for their loan repayment. This will enable them to build a savings to cover emergency expenses, such as losing their job. Your child will still be liable for their monthly payments - with or without a job - so it's best to have at least a month and a half's worth of income just in case.
If are currently a co-signer looking for some relief:
- Refinance while interest rates are low: If you have already cosigned student loans for your child, talk to them about refinancing to a better interest rate. Make sure you shop around for refinancing offers. Credible takes the stress out of this process by allowing borrowers to receive refinancing offers from multiple lenders, by filling out just one form. And because Credible is not a lender, you can ensure that you are getting an independent and transparent understanding of your options. The average borrower who refinance through Credible saves more than $11,000 over the life of the loan. Refinancing can also give your child options to adjust their repayment plan.
- Consider refinancing to gain additional co-signer release options: Citizens Bank offers a co-signer release after the borrower makes 36 months worth of consecutive payments. If you don't like the release options available to you with your current lender, your strong co-signing credit can be used to refinance to a lower rate and with more favorable co-signing terms with a new lender.
Though your child's pursuit of higher education can leave you financially exposed as a parent, there are many ways to weather the storm. Work with your child now to find a repayment plan that works best for both them as the borrower and you as the co-signer, in the event you wind up financially responsible.