Cosigning child’s student loans ‘risky business’

Just a few weeks ago, thousands of proud Kern County families watched their students walk across auditorium stages and into exciting lives as college students.

Those were proud moments. But now, reality has set in. How are those college educations going to be financed?

For the top of the class and financially needy, there will be grants and scholarships. For the rest, there will be federal and private loans and a lot of help from families.

The cost of a college education continues to climb, as does the interest rates charged for student loans. In just a few weeks, a freshman class of college students will be unloading their boxes into dorm rooms and unloading their first installment of nearly a lifetime of debt.

It begins with just a few thousand dollars and may climb to more than $100,000. While that may seem overwhelming, the idea is that with a college degree, students will land good-paying jobs and be able to repay loans.

But the “idea” is not always realized. Depending on a student’s field of study, salaries may be low and jobs nonexistent. Many freshly minted college graduates are back living at home and searching for jobs.

This scenario is playing out in the lives of many of my boomer financial clients, who are jeopardizing their retirements by helping their children pay for their educations.

I have tried to convince them that they must prioritize themselves. But usually this advice is ignored, as they borrow against retirement funds or take out loans to pay for tuition, books, room and board. Particularly concerning is their willingness to cosign for student loans.

Consider my clients Mary and Bob. Their son, John, graduated from high school two years ago. Their daughter, Brittany, will graduate next year.

John’s graduating grade-point average was 3.8 – not strong enough to land a big scholarship. And although the couple had burned through their retirement savings when Bob was temporarily laid off during the Great Recession, they both earn too much now for John to qualify for tuition assistance.

An aspiring engineer, John was accepted to a prestigious private university at an annual cost that exceeds several thousands of dollars a year.

John turned first to federal loans, which offer favorable interest rates, require no one to cosign and include some student borrower protections. But the amount he could borrow was capped and he turned to loans from private lenders, which require a cosigner. He turned to his parents.

I strongly argued against Mary and Bob cosigning John’s private student loans, which generally have less favorable rates. On its website, the Consumer Financial Protection Bureau has posted a guide explaining the differences between federal and private loans and the risks.

The most immediate consequence of cosigning a student loan is the impact it can have on the cosigner’s credit rating and ability to borrow.

While there are provisions with federal loans to have the debt discharged — in the event of a student’s death, for example — this is not always the case with private loans. And there are horror stories about grandfather-cosigners dying and a private lender immediately demanding the primary borrower (student) pay off a loan.

Both federal and private loans claim to allow cosigners to be “released” from responsibility, but obtaining a release often can be difficult.