I was recently talking to some family friends, and they were running into a dilemma. Their daughter was going to be starting college, and they didn’t qualify for any type of financial aid. They were looking at private student loans to pay for college, but they were concerned about having to cosign the loans.
Beyond the obvious — there are a lot of other options besides private student loans — it brought up a challenge that many parents face.
On one hand, you want to provide for your child. On the other hand, you’re concerned because you need to provide for yourself in retirement in a few years.
If you find that private student loans are the direction you’re going to take, and you have to cosign for your child, make sure that you fully understand what you’re getting into.
The Consequences of Cosigning a Student Loan
If you do cosign a student loan for your child’s education, you need to realize that you are on the hook for the student loan just as much as your child is. If your child doesn’t pay the bill, the lender can, and most likely will, come after you for payment of the debt.
This can have real consequences for parents that are getting close to retirement. You’ve probably heard this before, but you can’t get a loan for retirement.
As such, that’s why I’m a firm believer that cosigning a student loan is dangerous and inappropriate for most.
Before you go down this road of private student loans, make sure you check into all of your options. We cover this in our Definitive Guide to Student Loan Debt, but basically, you should make sure that you have fully exhausted all of your federal student loan and financial aid options.
The biggest one that comes to mind for parents are PLUS loans — loans that parents can take out for their child’s education. The biggest advantage of a PLUS loan is that it can qualify for various student loan forgiveness and deferment programs. So, even though the parent is the primary borrower (just like a private loan), there are options to get out of it legally.
After looking at the loan options, you should look into grants and scholarships. And finally, you should make sure that you consider the real possibility of working through college.
If you still think that getting a private loan is a need, follow these steps.
Being Smart About Cosigning a Student Loan
If you are going to cosign a loan for your child’s education, consider getting a life insurance policy on your college student. It should be a 20-year term policy that covers the total amount of borrowing you can expect from your student during their educational career.
For example, if it is going to cost $25,000 per year for four years, you should look at a minimum life insurance policy of $100,000. Actually, it should be about $150,000 to take into consideration any interest and expenses that could accrue.
Why life insurance? Because the ability to get out of this debt depends on your child’s ability to pay. If they graduate and get a job, they should be able to repay the debt. However, if they die during college, or even after college before the loan is repaid, you will not only have lost a child, but you’ll be liable for repaying all their student loan debt.
The cost of life insurance on a young healthy adult is cheap! This tiny bit of protection is well worth the piece of mind should you need to cosign a student loan for your child.
Do you know a parent who cosigned a loan for their child? Send this article to them and make sure they are protecting themselves!
Robert Farrington is America’s Millennial Money Expert® and America’s Student Loan Debt Expert™, and the founder of The College Investor, a personal finance site dedicated to helping millennials escape student loan debt to start investing and building wealth for the future. You can learn more about him here.
He regularly writes about investing, student loan debt, and general personal finance topics geared towards anyone wanting to earn more, get out of debt, and start building wealth for the future.
He has been quoted in major publications including the New York Times, Washington Post, Fox, ABC, NBC, and more. He is also a regular contributor to Forbes.