The Student Loan Debt Crisis And Your Retirement
Should Parents Co-sign A Student Loan For Their Child?
With escalating college costs, and the resulting difficulty getting financing for college loans, more students are turning to a bank of a different sort, mom and dad.
Before signing on the dotted line, parents need to be aware of the risks and ramifications of their financial situation if they co-sign a college loan for their child.
You’re Financially Liable.
Even though you’re a co-signer, you are still 100% liable for paying back the loan in the event, your child defaults on the payments. In other words, the bank will go after your assets for repayment since it’s likely your child will not have any substantial assets of their own.
Your Retirement Savings Could Be In Jeopardy.
You’ve worked hard all your life and built up a nest egg for you and your spouse to retire. Your retirement assets could be in jeopardy if your child defaults on the loan that you co-signed. In other words, depending on the size of the loan you co-signed for, you could lose a substantial portion of your retirement savings.
Can You Handle A Default On A College Loan?
“Before co-signing a college loan for their child, parents need to ask, can their retirement plan handle the financial consequences if their child defaults on the loan?” - Kevin Beaulieu, Managing Partner, Independence Financial Providers.
The table to the right is a listing of the total cost for a 4-year degree at various New England schools.
If your child defaults on the total cost of a degree, parents could lose anywhere from $50K to $200K.
Your Credit Could Be Damaged If Your Child Defaults On A Loan You Co-signed.
Even if your child doesn’t default on the loan, if he or she misses payments, your credit could be negatively affected. All late payments are reported on your credit report.
What would it mean for you? Your credit could take a hit, and as a result, interest rates on your credit cards could go up. Also, it’s possible you could be denied for a new loan or a new credit card.
What Are The Chances Your Child Defaults On The Loan?
According to a survey from the Federal Reserve Bank, the number of college loan recipients that are behind in making their payments may give you a reason to pause before co-signing a loan.
“Thirty-nine percent of respondents with outstanding student loan debt from their own education indicate that one or more of their loans are in deferment. Eighteen percent report that they are behind or in collections on one or more of their loans.” - The Federal Reserve Bank.
A deferment is a postponement in making payments while a loan that is behind or in collection means that the loan has not been paid for a period of time.
Remember, if you’re thinking of co-signing a loan for your child, you share all the risks and liability just as you had borrowed the money yourself.
Before signing on the dotted line, consult one of our financial advisors to discuss your retirement needs. At Independence Financial Partners, we’ve helped thousand of clients in Rhode Island, Massachusetts, and Connecticut with retirement planning, wealth management, and life planning.
Please visit our Contact Us page to have one of our 60 financial advisors speak with you today.
The information presented is not intended as tax, legal or financial advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek such advice from your professional advisors. The content is derived from sources believed to be accurate.