Let’s paint a quick picture of the college landscape: there is $1.2 trillion in outstanding student loan debt, and, if the current system remains, every graduating class from this point forward will become the most indebted class in history.
That may seem dreary, but it’s important not to paint college affordability with a broad stroke because a picture may still be worth 1,000 words, but a solid financial college plan is worth way more than $1,000.
Part of that plan may include student loans. Before you sign on the dotted line as a cosigner for your teen and send them on their merry way, consider these important facts:
- Consider ALL options
Federal loans never need a cosigner and have more favorable terms for students to pay back the money in a fair and timely manner. Look into these types of loans first, along with any and all scholarship or grant opportunities. Only then should you look into private loans, which require a cosigner.
- Know the implications of becoming a cosigner
If you’re thinking about making a big purchase like a car or a house, you may want to reconsider your choice to cosign a student loan. Becoming a cosigner makes it more difficult to take out other loans or credit cards. Plus, if you miss any payments, your credit score will suffer. And if you want to get out of the pact, think again. It’s next to impossible to relinquish your responsibility once your teen is 21 years old and your name is still on that paper. In extreme cases, cosigners sometimes remain responsible for payments even if the person who is receiving the loan passes away. That is why many experts recommend a life insurance policy in conjunction with a private student loan.
- Be sure your teen is on board with the plan
Every parent will differ in their approach to their teen’s financial contribution. If you expect your teen to contribute, ensure that they can do so responsibly. You can get your teen accustomed to this responsibility by setting up a chores-for-allowance system. A more extreme option is to have your teen sign a document that stipulates they will repay any missed payment and/or fees you cover over the life of the loan. In an ideal world, this will mostly serve as a real-life reminder of the loan and not a first step toward a date in daytime television family court.
- Be realistic with the loan
One of five things all students should know about loans is to only take out the amount of money they truly need. The general rule of thumb is to estimate the salary your teen could earn upon graduation and stay below that number. If you learn better through hard figures, The Wall Street Journal reported that between Oct. 1 and Dec. 31, 2015, private debt collection companies hired by the Department of Education garnished more than $176 million in wages from defaulted student loan borrowers in order to pay back their debts. You don’t want that for your teen, do you?
After poring over the reality of the situation, you may find it in the best interest of both you and your teen not to cosign a student loan. You may get a cold shoulder or two because of it, but you will be able to say, “I told you so,” when they graduated debt-free.