About a month ago I wrote a post on the growing number of retirees who are getting a nasty shock on their Social Security checks: the government is taking as much as $1000 out of each benefit payment to repay delinquent student loans. In some cases these loans are more than 40 years old. It doesn’t matter if the retiree took the loan out for him- or herself, or for a family member, the government wants its money back.
It’s something that anyone who took out a federally-backed education loan has to consider (and most student loans, whether they are directly from the government or through banks, fall into that category). But, the borrowers are not the only ones who have to take this into consideration. If the government can’t find the person who borrowed the money, they will look for co-signers.
Co-signing an education loan is a common enough practice: students ask parents and sometimes grandparents to co-sign a loan in order to get a better interest rate. More often than not, parents—who generally have established credit and qualify for lower rates—agree and sign. It seems like the logical thing to do to help the borrowing student reduce the cost of the loan. But doing so can come back to haunt the co-signer.
It’s a pretty straightforward risk-reward consideration. Family members who volunteer, or are asked, to co-sign should engage in a frank and open discussion on the realities of repayment. This is an excellent time to have a reality check on how much is being borrowed and the likelihood of completing the degree. There is a great deal of benefit in borrowing money to complete an education and essentially no benefit to borrowing money if the degree is not completed. If you are asked to be a co-signer, do some research: If the loan is guaranteed by Sallie Mae, once the borrower has completed school and made 12 consecutive on-time payments, the co-signer can be released from the obligation. And there are other factors that need to be considered, as well. For example, many student loans must be repaid even in the case of borrower’s death. For that possibility, as remote as it might seem, a life-insurance policy is an appropriate course of action.
An education loan is probably the first major financial commitment of a young person’s life. It should be treated with the same degree of seriousness that all financial commitments require.
Take Away: When it comes to federally-guaranteed education loans, the government wants its money back and will pursue co-signers to get it.