Monthly Features

Do you REALLY want to co-sign a student loan?!

It’s that time of year again when naïve high school seniors will take out massive loan debt so they can attend their “dream colleges.” Of course, years from now many will be lamenting that decision when the debt means they can’t afford a home, a vacation and perhaps even a new car.

Will you as a parent, other relative or friend be a party to this? There are serious potential financial implications for YOU if you do.

Any student who is a citizen or Permanent Resident (green card) can borrow up to $27,000 over four years under the federal undergraduate student loan program. There is no co-signer required. However, many students need to borrow additional private loans to pay for their dream colleges, thus they will need a credit-worthy co-signer. That means there will be underwriting involved and if you are the co-signer, YOU are responsible for the outstanding loan if the student defaults.

If the student defaults, some co-signers have been able to negotiate relief of some or all of the student debt, depending on the lender. But if that happens, it is our understanding that the debt that has been forgiven becomes taxable income for you as the co-signer.

So do you enable a naïve student now, only to have it come home to roost financially for the student and perhaps for you, or do you force the student to face the financial realities now? The latter is hard to do, but you may be doing the student a favor that they will come to appreciate later in life. Either way, good luck!

Publication Date: April 2016