“Retirement” and “student loans” are two terms you might not hear often in the same…
If you’re a parent or grandparent, you probably want to do everything in your power to give your children or grandchildren the best possible start in life. That’s what good parents do. But sometimes, your good intentions and actions can backfire. Co-signing on private student loans is an example.
About 70% of college students take on loans, graduating with an average of $28,950 in loan debt. Federal education loans are hard to come by and often don’t cover the full cost of school, so many students are turning to private loans.
Private student loans are given by banks such as JP Morgan Chase, Citigroup, or Wells Fargo. Unlike federal loans, private student loans usually require a co-signer, and the co-signer is responsible for repaying the loan balance if the borrower is unable to. About 90% of private student loans have co-signers – typically you, the parent. But the stringent terms of private loans can leave you in a bind.
Unknown to many borrowers, many private education loans have provisions that put the loan in default, even if the borrower has been making payments on time. If the borrower declares bankruptcy, the loan is usually put in default and the full balance is due. With the current economy and many younger people struggling to find suitable employment and facing debt, this can easily happen.
Outliving one’s children is an unthinkable prospect, but it also does happen. The death of the borrower also puts the loan in default, leaving the co-signer responsible for repayment.
Here are some ways to avoid being left on the hook for your child or grandchild’s student loan.
Include a release provision
Many private student loans include a co-signer release, in which the co-signer is released from the loan after the borrower has made a certain number of consecutive and on-time payments and a credit check has demonstrated the borrower is financially able to repay the balance. But most private lenders don’t tell you about this provision, so you have to ask. The federal Consumer Financial Protection Bureau released a report showing many complaints by borrowers and co-signers about misleading and contradictory statements from lenders about the number of payments needed to qualify for co-signer release. The bureau also has sample letters available to send to lenders to inquire about this provision.
Negotiate the loan
If the co-signer is unable to repay the loan, there are times when the loan can be renegotiated. The lender may agree to a lower interest rate, longer repayment time, or even forgive part of the loan.
Taking out a term life insurance policy on the borrower may provide peace of mind. A policy with constant monthly premiums, or one where the premiums steadily decrease as the loan is paid off, may be most appropriate. Since the borrower is young, in their 20s or 30s, such a policy may cost just a few hundred dollars. You may want to consult a financial advisor to see which insurance product would be best for your situation.
While the death or bankruptcy of the borrower can leave the co-signer responsible for the loan, the reverse case is also true and happens more frequently. If a parent or grandparent dies and is a co-signer on a student loan, this puts the loan in default and the borrower is now expected to pay the full balance. To provide for this contingency, make sure you have a will or revocable trust in place so that your assets will transfer to your designated beneficiaries without delay, and provide sufficient funds to enable your child or grandchild to pay off the loan if needed.