News You Can Use: The Dangers of Co-signing Student Loans
“Don’t agree to guarantee another person’s debt or put up security for someone else. If you can’t pay it, even your bed will be snatched from under you” (Proverbs 22:26–27 NLT).
Last August, we looked at some of the dangers of student loans for college students, noting the pressure that significant debt puts on young adults and young families. This year, we’ll look at the dangers of student loans for another group – parents.
The skyrocketing costs of college education have led to a record $1.3 trillion total student debt(1). Much of this debt consists of public loans, but a significant amount of it is in private loans, which are often used to supplement federal loans. Private loans typically have higher variable interest rates and most often require a cosigner. In fact, approximately 90% of private loans are co-signed by a parent, according to the Consumer Financial Protection Bureau.
Parents often co-sign a student loan thinking that they are merely a backstop for their child. But in the eyes of the bank, the parents take on equal responsibility for loan repayment. Worse, the bank is under no obligation to keep the co-signer updated on the status of the loan. A student may be missing payments or be late on payments without the parents’ knowledge – even though the parents’ credit score will be impacted.
Parents would be wise to keep in mind that the reason banks require co-signers is that they believe the borrower to be a credit risk. If they were confident of the student’s ability to repay the loan, they would not require a co-signer.
Parents would also be wise to keep in mind the wisdom of scripture. Several times, Proverbs warns against what today would be the practice of co-signing a loan. Many parents have endangered their own retirements or their ability to keep up with increasing medical costs by taking on responsibility for tens of thousands of dollars in debt without having budgeted for repayment.
If your ministry serves parents who might be considering co-signing a student loan, help them think through some alternatives. One or more of the following may be helpful:
- Consider having students work for a year or two to help save for college. This can be particularly helpful for students out of high school – not only will they reduce their dependence on student loans, but they’ll likely value their education much more highly!
- Again, for students just coming out of high school, community college can often be a great option for the first two years. It’s typically much less expensive (and in some states like Tennessee, it’s actually free to residents of the state), and it may also provide a better transition than going straight to a large university.
- In-state college tuition is typically much less expensive than out-of-state tuition. Sometimes students have just one “dream college” in their sights, but that dream can turn into a nightmare when extra debt is incurred to go out-of-state.
- Many colleges have multiple scholarships and grants that go unused each year because no one applies for them. Research carefully opportunities to get assistance with tuition.
Student loans come due for repayment early in a career, when earnings are typically lowest – and that assumes that a student can get a job right out of college (which is not a guarantee). Whatever alternatives the parents served by your ministry are open to consider, you’ll be doing them a big favor by helping them to understand the seriousness of student debt and the risk of taking on responsibility for that debt by co-signing.
- Statistics in this paragraph taken from http://www.cnbc.com/2016/01/09/the-dangers-of-cosigning-a-student-loan.html, accessed on August 22, 2016.