In the United States, it may seem impossible to be a student without student loans. State school fees can also cost tens of thousands of dollars, while private lessons in some high schools have reached $ 50,000 a year or more. As the university costs so much, it should not be surprising that the research indicates that at least one in five American families is carrying student debt.
As student loans have become a fact, many parents are now faced with an important question: should I grant loans to students for my children? College students often have little credit history, and they turn to parents, relatives or even friends to advise them so that they can get the most favorable loan rates.
However, before agreeing to sign a student loan for your children or anyone else, there are some important considerations to think about.
Loans to dependent students: an important risk
The allocation of costs is always risky because it assumes joint responsibility for the full amount of student loan debt. In other words, you are 100% responsible for the loan you ask, even if your son or daughter is the one who is actually receiving the money to go to school. If your son or daughter cannot pay or does not pay for any reason, the account will be your responsibility.
When you give a student loan, you take an even greater risk than you do when you guarantee other types of debt because the law treats student loans differently:
- Student loans cannot be discharged in bankruptcy. Except in very special circumstances, there is no way to get rid of student loan debt except by paying it.
- Student loan lenders can celebrate social security. This can put the security of your pension at risk.
- Credit institutions can demand tax refunds . This money is taken directly from the tax refund check for defaulted government loans.
- Lenders are increasingly taking advantage of private credit collectors. Credit collectors can track you down using public documents and are often very aggressive in collection efforts.
- Federal student loans have no statute of limitations. Unlike other debts, which become void after seven years, the debt collectors can pursue you indefinitely for unpaid student loans.
Due to these special rules, the debt collectors recover approximately $ 0.80 on the dollar for the outstanding student loan debt compared to $ 0.20 on the dollar for unpaid credit cards.
What to consider
The special debt collection rules should give you a break if you are considering consigning for student loans, as the debt could be taxed for the rest of your life.
- Your children may not be able to pay. Even if your children have the best intentions, some students are simply unable to get enough jobs to pay back their loans. Before signing a student loan, consider whether the degree you are getting could actually lead to a career that will give you an income to repay the loan.
- If something happens to your children, you may be left with the account. No parent likes to think of something that happens to their children, but unfortunately accidents and illnesses occur. If your child is severely disabled or suffers from premature death, you may be left with an unpaid student debt plus all the rest.
- Your retirement is at risk . Wanting to help your children is noble, but there are no loans to get you through the pension. You also have to take care of your future, and that means investing a significant amount of money in your retirement savings.
- The granting of a student loan requires a long commitment. With graded payment programs and long repayment periods, it is not unusual for people to bring a student loan balance for decades. This means that the designation of a student loan could be a 25 to 30 year commitment on your part.
- The assignment of a student loan can create a family conflict. While you might want to help your children, also put the emphasis on the relationship by mixing your money. What will happen to your relationship if your children do not repay the loan as promised?
- Cosigning can damage your credit. If your child is late in paying, this can appear on your credit report and damage your credit score. Even if your child makes payments on time, the required monthly payments will be shown on your credit report as an obligation. This can affect the debt / income ratio and the debt / credit ratio, and when creditors see that you owe this money, it can become more difficult for you to get a mortgage or a car loan if you need it.
Before signing a loan, make sure you understand the implications of all these problems. You should sit down with your child and have a serious discussion about the importance of the decision you are making. Many students do not fully understand the debt they incur when they go to college, and you need to make a joint family decision that your child is really ready to take the responsibility associated with obtaining a degree and going into debt.
Consider the type of student loan
Another final question that you need to ask yourself before signing a loan is: “What kind of loan is my child taking?” To qualify for federal student loans, students usually don’t need cosigners, as these types of loans are specifically targeted at college kids. In many cases, however, your child will need you to grant a private loan.
Private loans can have higher interest rates than federal student loans. They may also have limited options for repayment, and may not offer the flexibility of being able to postpone the payment, put the loans in tolerance, or make payments based on monthly income. If your child is taking private loans, make sure you have researched all other federal aid options first and make sure you have all the details about the lender and the terms of the loan. If you sign, you take responsibility for this private debt. Therefore, it is particularly important to do the necessary research.
Although it may seem that good parenting is willing to provide student loans for your children, you need to make sure that you make smart choices for yourself too – with a special consideration given to your oldest years when you are no longer able to work. If you decide that cosigning is not right for you, there are many ways you can help your child, including assistance in finding alternative loans, scholarships and other financial aid options. You never feel obliged to make such an important decision for your financial future, unless you are willing to accept that circumstances can make you pay the bill.
Have you ever signed a student loan for your children?
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