Co-sign­ing your child’s stu­dent loans can have alarm­ing con­se­quences

The Washington Post Sunday - - BUSINESS - MICHELLE SIN­GLE­TARY Write Sin­gle­tary at The Wash­ing­ton Post, 1301 K St. NW, Wash­ing­ton, D.C. 20071 or sin­gle­tarym@wash­ To read more, go to michelle-sin­gle­tary.

Your chil­dren want to go to col­lege, and you’ll do what­ever it takes to get them the ed­u­ca­tion you be­lieve is a pre­req­ui­site for pros­per­ity.

But how far would you go to help fund their ed­u­ca­tion?

Would you risk your re­tire­ment? Or your good credit name? By May 1, high school se­niors na­tion­wide will have to de­cide where they want to at­tend col­lege in the fall and send in their de­posit. Not long af­ter, they’ll be hit with the first full bill for their ed­u­ca­tion. And many will need their par­ents to co-sign on a pri­vate stu­dent loan.

Stu­dents can bor­row from the fed­eral gov­ern­ment on their own, with­out even hav­ing to get a credit check. But if that bor­row­ing comes up short — and it will for lots of young adults — there’s the pri­vate stu­dent loan mar­ket, which does look at credit his­tory. This means that many of th­ese new bor­row­ers will need a co-signer. Cue the par­ents and their good credit name.

But a new sur­vey shows that many par­ents don’t fully un­der­stand the con­se­quences.

LendEDU, an on­line mar­ket­place for stu­dent loans and re­fi­nanc­ing, con­ducted a sur­vey of 500 par­ents who have co-signed on their chil­dren’s pri­vate stu­dent loans.

“We wanted to find out how many co-sign­ers are ac­tu­ally feel­ing the im­pact of co-sign­ing,” said LendEDU’s Nate Mather­son, co-founder and chief ex­ec­u­tive. “Our sur­vey showed that a sig­nif­i­cant num­ber of par­ents are, in fact, hurt­ing fi­nan­cially as a re­sult of act­ing as a co-signer.”

Here are some high­lights of what the sur­vey found:

Nearly 57 per­cent of par­ents said their credit score has been neg­a­tively af­fected.

When you co-sign, your good credit score can be­come vul­ner­a­ble. If the pri­mary bor­rower makes a late pay­ment, that neg­a­tive ac­tion dings your credit his­tory, too. It’s just as if you made the late pay­ment, be­cause the loan is yours, too. More than a third of par­ents sur­veyed by LendEDU said their chil­dren have been late on a pay­ment.

Your credit score can also be neg­a­tively af­fected be­cause you’ve in­creased the amount of debt you owe. Keep in mind that when you co-sign, you are equally and fully re­spon­si­ble for the debt. Let’s say you’ve co-signed for $50,000 worth of stu­dent loans. That counts to­ward your to­tal debt fig­ure when you ap­ply for a loan.

Fifty-eight per­cent of cosign­ing par­ents said their chil­dren have asked them for help mak­ing monthly pay­ments. Imag­ine the fi­nan­cial pres­sure you’d feel to give them money, es­pe­cially con­sid­er­ing that if you didn’t, they would be late or miss a loan pay­ment, which would again blem­ish your credit pro­file, too.

Thirty-four per­cent of par­ents told LendEDU that cosign­ing has hurt their abil­ity to qual­ify for their own mort­gages, auto loans or other types of fi­nanc­ing.

Fifty-one per­cent said the loans have jeop­ar­dized their re­tire­ment sav­ings. If you’ve got to bail your child out, that might mean di­vert­ing money that you need for your nest egg or mak­ing early with­drawals from your re­tire­ment sav­ings to help pay the loans when your kid can’t.

When par­ents were asked whether they un­der­stood the risks of co-sign­ing, 33 per­cent ad­mit­ted they didn’t.

More than a third (35 per­cent) of par­ents said they re­gret­ted mak­ing their de­ci­sion to co-sign.

Mather­son es­ti­mates that there is $120 bil­lion in co-signed pri­vate stu­dent loans in the United States. Each year, about 1.4 mil­lion stu­dents bor­row us­ing such loans, he said. And about 90 per­cent of the loans are co-signed.

In­ter­est­ingly, LendEDU polled col­lege stu­dents ask­ing whether they thought their stu­dent loans would be for­given. Nearly half thought they would qual­ify for the fed­eral stu­dent-loan for­give­ness pro­grams af­ter grad­u­a­tion. But the truth is that many won’t. Even if they do, they still have to make 120 on-time pay­ments. (Pay­ments have to be made no later than 15 days af­ter the due date.)

More than half of all young work­ers worry about re­pay­ing their stu­dent debt, ac­cord­ing to a sep­a­rate sur­vey by Amer­i­can Stu­dent As­sis­tance.

Sixty-one per­cent of the young adult bor­row­ers said they have con­sid­ered get­ting a sec­ond job to help pay off their stu­dent loans. Fifty-four per­cent said they would put off sav­ing for re­tire­ment un­til af­ter they’ve paid off their loans.

If you’re a par­ent con­sid­er­ing co-sign­ing, the re­sults of th­ese two sur­veys should give you se­ri­ous pause. And if you de­cide to co-sign any­way, un­der­stand that there’s a great like­li­hood that the stu­dent debt your child ac­cu­mu­lates will af­fect your own fi­nan­cial sit­u­a­tion. Make sure you can af­ford the pay­ments.

Michelle Sin­gle­tary THE COLOR OF MONEY

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