The Pros and Cons of Co-Signing Student Loans

It seemed like only yesterday our kids were starting kindergarten and now they are preparing to go off to college.  The costs of college today can be exorbitant and most students need to take out loans to cover the costs of tuition, fees and room and board.   While it is typically not necessary to have a co-signer to secure the loans, a co-signer may help lower the cost of the loan by qualifying for a lower interest rate.  While paying less in interest may sound like the way to go, don't be too hasty to start signing loan applications just yet.

As a co-signer you may be legally obligating yourself to cover all costs of this loan in the event the student cannot or will not repay.   Even the unforeseen tragedy of your child dying may not excuse you from your financial responsibility.  You may have even heard a few stories in the news recently that speak to this very subject.  For example, Lisa Mason took out $100,000 in loans for nursing school that her father Steve co-signed.  Tragedy fell upon the Masons and Lisa succumbed to liver failure.  It was not long until the bills started piling up.   Steve Mason, a church pastor, was not able to keep up with these payments and soon the late fees and interest payments began piling up and the balance ballooned to over $200,000.  If these had been federal loans, the Masons may have been able to get relief, however because they were privately held they had no choice but to pay.

Loans issued by a private company, including Sallie Mae, are unsecured.  This means there is no collateral or assets to back them.  They are purely based on the borrower's and co-signers credit-worthiness.  When the co-signer signs he agrees to be "jointly and severally" liable for the loan. 

Federal loans are much less risky as they are discharged after the death of the borrower.  These loans may also be discharged in the event of a total and permanent disability.  The disability must be terminal or affect the borrower for at least five years.

If you have already co-signed on your child's student loan it is possible to eventually remove yourself as a co-signer.   After graduation, the primary borrower may apply to release you as a co-signer after making 12 consecutive full payments of both principal and interest.  They must show all around good credit habits, they need to be paying all of their loans on time, not just their student loans.  They must also demonstrate sufficient income to cover all of their debts.  If these criteria are met, the co-signer will most often be released from their obligations.  

This can be a great relief as you are not burdened with the balance of your child's student loan. As you know sometimes life throws a curveball and you may end up in a tragic situation like the Masons.  How do you prepare for such contingencies?   Your insurance agent may be able to help out with a term life insurance policy.  A policy on your child can cover the student loans in the event of their passing.   When setting up the policy make sure to designate yourself as the policy owner and the primary beneficiary.  You can name your spouse as the contingent beneficiary.  This allows any payments from the policy to be used to pay off the student loans.   When sitting down with your agent, make sure you fully comprehend your total insurable interest.  The insurable interest is the financial loss that would result from the death of the insured.  So, in the case of a student loan, it is imperative to keep accurate records of all loan documents and bank statements.

While no one ever wants to think of the possibility of losing their child, it is a good idea to be prepared and not let a devastating situation get any worse.
 

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