Asked to co-sign a college loan

Paying for College
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Hi
I’m looking for some advice or pointers from others. My husband was just asked to co-sign a college-related loan for a relative. We are waiting for all the details, but pretty sure this is a private loan taken out by the parents (the relative who asked us) that they are already making monthly payments on. Their student will be a sophomore and I have to assume they have additional student loans that will start up after graduation.

Anyone know what info we should have/ask before-hand? I’m looking at it very cautiously, while my husband is looking at it as a definite (it’s family!). I’m aware we could potentially be on the hook for the loan amount, but unsure of other ramifications (credit, etc.)

Any input is appreciated! Thanks!

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I would be cautious as well. Co-signing impacts your ability to get other debt instruments (mortgage, credit cards, your kids’ loans, etc.) because it would increase your debt ratio, not to mention you would be fully on the hook for the entire loan amount (principal plus interest) should the relative not be able to pay the loan back per agreed upon terms. It could also impact your credit score, as it will show up on your credit report (which lenders use to ascertain how much potential debt you have). Edited to add: If you do have a good credit score, the impact may be minimal, but suggest talking with a financial person to discuss the ways co-signing a loan could impact you and your family.

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To me this sounds very bad.

First of all, I do not think that anyone should take on education loans for undergrad that are greater than the federal subsidized loans. If necessary, a student should start at community college and then transfer to an in-state public university.

Also, if the parents are not able to cosign, this implies that the parents would not qualify to borrow the money. This implies that not only is the child going into debt further than they can afford, but the parents are probably already in debt more than they can afford. This sounds like a house of cards that will collapse at some point.

Also, you say “the student will be a sophomore”. This means that they are already over their heads with just freshman year debt. There are still three years left even if they do not fall behind and need more time. The majority of students in the US do not graduate in 4 years. Most graduate in 6 years or less.

This is a family that has chosen a university that is straight out unaffordable for them.

I would interpret this the same way as if they just asked you to pay the full price of education for the remaining three years of university. If this family is so close to you that you would feel comfortable paying the full price for three full years of education then maybe you could go for it. Otherwise you need to say no.

If a cousin came to me and said “my child does not want to attend an affordable university, will you give us $200,000 so that they can attend a private university” I would say no.

Just say no.

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My opinion…do NOT cosign this loan. It sounds like the parents or whomever need a qualified cosigner or they can’t get the loan.

That being the case, please don’t assist them in getting in more debt.

I know this might seem like it’s punishing the college student, but have more debt than one can manage is never a good idea.

Remember too…if you cosign and they don’t pay…YOU are on the hook for the repayment.

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This needs its own post. If your husband has the resources, he can consider giving them the needed money if the amount is not huge.

I suppose he could loan them the money if you have it…Remember, any loan you might decide to give them should be viewed as a gift because you might never see repayment of that.

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This sounds awful.

The student has only completed 1.5 years out of 4 (assuming they will graduate on time which is not a foregone conclusion) and already the parents have maxed out their borrowing capacity and need a cosigner. Where is this trajectory supposed to go?

It would be one thing if the student were in the final semester before graduation and needed a cosigner to bridge a small gap in borrowing capacity. But for a student who isn’t even halfway through? This will turn into a case of “in for a penny, in for a pound” and you will be asked to assume debt that you probably wouldn’t even consider for your own child.

It is important to understand that if the student can’t pay back the loan, you will be fully responsible. If the student drops out and doesn’t finish the degree, you will still be responsible. Even in the rare tragic case in which the student passes away or becomes incapable of gainful employment for physical or mental health reasons, you will be responsible. Even a bankruptcy won’t get you out from under this kind of loan.

I’m sure saying no will be very difficult, but if this family needs a cosigner at the point when the student is only in year two, this is not a viable situation. The student needs to be considering transfer options.

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This is a HORRIBLE idea. No. Just flat out no.

PLUS loans are available to the maximum of whatever college costs, IF the parents have decent credit. There is no income screen. All you have to do is have decent credit. So why can’t the parents manage their own borrowing for college? Because they don’t have decent credit. So they’re not going to pay off this loan, either.

If your husband wants to pay some of the relative’s tuition, and you guys have oodles of money, and can afford to do this without jeopardizing all your other financial commitments and your retirement planning, okay. But otherwise, NO.

You can fully expect that you will be on the hook for paying off the ENTIRE loan, with all the accumulated interest. So, if you wanted to gift the young person money, would you do it as just paying his tuition now, or as taking a loan (with points, and high interest, and accumulating interest), that could totally ruin your credit rating if you don’t pay it off?

There are other issues. When parents borrow money to pay for their children’s college, they make a deal with the kid. Where the kid goes. How much it’s going to cost. Whether their major will lead them to gainful employment and self-sufficiency. Are they making progress towards the degree? You will have none of this, in co-signing this loan.

Just in case your husband doesn’t understand, he is NOT just co-signing the loan. He must FULLY expect that he will wind up paying off the entire loan. If he has any notion that the kid or the parents will pay a penny towards this loan, he needs to let that go immediately. Anything other than a flat out gift of tuition payment, no strings attached, will be one thousand percent guaranteed to lead to a rift in the family. The kid and his parents will be ashamed that they can’t/won’t/don’t pay off the co-signed loan. Not ashamed enough to pay the loan off - they will have other purposes for their money. But ashamed enough that they will cut off all contact with your husband. They will probably twist it around in their minds in some way that will allow them to portray to themselves and to everyone who will listen that your husband is the villain, too.

If you think this is unlikely, think again. The answer to this is either just pay some of the kid’s tuition, or don’t, depending upon what you can afford. But do NOT let your husband co-sign a loan for the tuition.

If you need a good excuse, he should tell them shamefacedly that his credit is not good, and that you’re trying to fix it, and your financial advisor has forbidden both of you to take on ANY more loans - just make up some story if your husband won’t just say no, that turns it into, we would if we could, but we just can’t. But whatever you do, do NOT let him cosign this loan. This is the sort of thing that could destroy your own finances, and your own marriage, if he were to do this. It’s financial infidelity.

Thank goodness he’s been straightforward with you about this thus far, and didn’t just go ahead and cosign it already, leaving you with a very nasty surprise. I’d praise him and thank him for this, and then the two of you decide whether you should contribute, and if so, how much, as a direct tuition payment, and if not, how to tell them that you guys are just in no financial position to help.

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I would do ANYTHING for my (many) nieces and nephews. Donate a kidney, give them a place to live, stash their stuff in my garage for umpteen months while they figure out a permanent living situation, lend them my car if they needed transportation for a few months to school or a job. I would kick in X thousand dollars (if I could at the time I was asked) if that would make a loan unnecessary, I would happily give what I could afford as a gift, no strings attached, with the assumption that it was going to tuition or to pay down an already existing loan. I would do whatever I could to help get a job, get into grad school.

I would not cosign a loan on their behalf. I see a world of trouble with this plan, starting with your husband’s relationship with the person who asked.

What happens next year when this relative takes off for Aruba or Disneyworld over Christmas while you guys stay home and enjoy a modest celebration? What happens when they upgrade to a big screen TV or trade in a 4 year old car while you are still driving your clunker? And the biggest risk- of course- what happens when the college kid in question decides “I don’t need a BA- I’m going into business with my boyfriend and we’re going to make a million dollars off our App idea”. Kid drops out- loans come due. Or kid has to take a medical leave-- it happens. Or one of the parents becomes disabled- it happens.

Kick in what you can for college kid’s tuition, cross your fingers and hope this kid can finish. This is the early stages of a spiral which can’t end well if you are on the hook or in the middle of it. Do you really want to be asking a relative “why the hell didn’t your kid find an affordable college”, or “why the hell can’t your kid live at home and commute to save 15K per year” or “Why are you in debt over a kid who has a C- average and is majoring in beer pong?”

You do not want to be asking these questions because you do not want to know the answers. Turn this one away and be thankful you’ve dodged a bullet.

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Just want to add- I am not anti-college loans.

I had them, spouse had them, we were a little surprised after we got married when we sat down and actually toted up the full amount. There it was- a very big number on the page, even though when you broke down grad school, undergrad, this one federally insured, this one from a commercial bank, each one looking pretty reasonable on it’s own. It was realizing that the big number you got when you added it together was now our responsibility as a married couple that was daunting.

We came up with a plan and we executed against the plan. Educational debt made our financial futures secure once we figured it out. We were both in high paying professions which would not have been possible without grad degrees, and even though we could have waited to go to grad school and found an employer to pay for some of it, I was earning so little in my job beforehand, it just made sense to borrow, get to a much higher salary quickly, and then pay it off.

But borrowing for someone else’s kid? This sounds like a nightmare because you are on the hook for the money without ANY say about how the “thrift campaign” to pay it off needs to get structured!

Your Husband sounds like a kind, generous person which is great. Explain to him how co-signing a loan for someone with bad credit is going to go down and he’ll likely get on board ASAP.

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I.e. it is a loan beyond the federal loans (probably for a college they cannot really afford) and the parents have bad credit or insufficient income/assets to be a borrower or cosigner.

If you have money and generosity to give money to the student or pay their tuition bill directly, that may be a better idea than cosigning a loan, which is likely to go into default anyway, with probably more hard feelings.

Otherwise, it would be a bad idea to cosign a loan that will probably go into default, with plenty of hard feelings along with the financial consequences.

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Thanks to everyone for your replies and thoughts. These are all my concerns - plus some new ones I hadn’t thought of yet. I’m taking all of it into consideration.

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It’s not just IF they make further choices you disagree with (Aruba.) These loans start repayment before graduation. They’re likely already struggling with payments on freshman year borrowing. And they have yet to pay for years 3 and 4, with no reasonable plan.

They could be back at you for more, then.

Their solution isn’t wise. Worse, it’s not the result of your own mess.

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NO.

  • You will be in debt for the entire $200K because they already can’t afford the school.

  • Parent Plus Loans are sold and resold over and over again.

  • Your credit is and will be impacted. With those kinds of loans it does impact your credit and credit report. Any new, large purchases for your needs will be impacted. (We just had a flood and have to purchase beaucoup items and services. We’ve got good credit and I can’t imagine what we would do if we didn’t.)

  • They couldn’t find another credit-worthy relative willing to sign, so they asked your husband. Not fair.
    No, really bad idea. Yes it will sour his relationship with the relatives, but listen to what your parents used to tell you: “Never do business with family or friends!”

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If you become entangled in their finances through cosigning, you will find yourself judging them. Three kinds of scenarios are likely:

A. They are in a bad circumstance with regard to college financing (e.g. low income, not in reasonable commute of a state college, in a state with poor in-state financial aid). Perhaps you may consider the student worthy of help, but if you are able and willing to help, better to gift the money to the student or pay the tuition than cosign a loan that is likely to go into default.

B. You consider the student worthy of help, but the parents made poor financial choices that mean that there is no college money when there should have been enough with reasonable parent financial choices. In this case, it is also better to gift the money to the student or pay the tuition than cosign a loan with the financially irresponsible parents.

C. The student made a choice of a much more expensive college than necessary, and the parents did not stop that choice. In this case, most here would not recommend enabling continued poor choices by both the student and parents, even if you have the money and generosity.

Of course, if you cannot afford or do not want to give the money in the first place, then you have no business cosigning a loan for that amount.

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I agree with everyone else. GIVE what you can. Do not co-sign. I would frankly be furious if my husband insisted on co-signing for a relative.

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That would be a big “NO” for me. I won’t even cosign loans for my own kids. And for a sophomore? There are 3 years left of hitting you up to cosign. Just say no.

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Also a no from me.

In addition, if you do decide to make a gift to help them out, you could pay directly to the school? e.g. pay the dining bill or rent for a semester direct.

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I agree with those who say no. Agree that you should kick in what you feel comfortable contributing, if that’s something you can do. But don’t co-sign a loan.

I have had former students default on co-signed Grad PLUS loans. Because the credit requirements for the parent and graduate PLUS loans are very loose (you don’t need good credit -it just can’t be bad), it’s bad news when credit is declined for these loans. What I found was that the students who had to get co-signers were pretty likely to get behind on repayment. It makes sense - unless they learn new patterns when it comes to budgeting, they are likely to fall back into bad habits. While this is not true for everyone, I saw enough of it that I would not want my credit tied to theirs.

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I would have to think very hard about that and the likelihood of repayment. It is unlikely I would co-sign undergrad loans for someone but I could imagine doing it for grad loans. For me it would be about paying it forward. A family friend co-signed my grad loans. I didn’t realize what a big deal that was at the time. It wasn’t a huge amount though - ~$20k. I prioritized those loans and repaid them in a year and am forever grateful to that person.

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My niece had another relative co-sign her loans because her parents were unable to do so. My niece now has a degree that resulted in a good paying job, and she has been consistently paying the loans so that relative hasn’t had to worry yet. The downside is that my niece was not careful at all with minimizing the total amount of the loans; I think money just isn’t real to kids until they have to start repaying it. She could have minimized the loans by going to her in-state university, and she also studied a year abroad and didn’t plan properly for it, so that she ended up having to do a 5th year of college in order to graduate with the right types of credits for her major.