How did one New Jersey mom end up on the hook for her son’s student debt even after he was murdered? The answer is simple: by co-signing a loan that’s how.
5 Reasons Why Co-Signing a Loan Is Never a Good Idea
Sooner or later someone will pin their college hopes and dreams on you co-signing a loan for them. Here’s why you should never co-sign-not even for your child.
1. You’ll be responsible for paying the student loan.
As the co-signer, you could inherit the burden of student debt if the borrower becomes sick or dies. When co-signing, you promise to pay the loan in the event the student borrower cannot or will not. In other words, you agree to pay the student debt in full come what may.
2. Co-signing will adversely affect your credit even in the best-case scenario.
Even if the student borrower pays the loan on time, your credit scores will most likely drop. That’s because 30% of your score is based on the amount of debt you carry. Co-signing also makes it harder for you to qualify for loans you may need because of the increase in your debt-to-income ratio.
3. Student loan default can thwart your financial dreams.
If your child or family member defaults on the debt, it will wreak havoc on your finances. As the co-signer, you may have your bank account frozen, wages garnished and credit score lowered. You could even get sued. What’s more, you may also have to pay late fees or collection costs.
Believe it or not, the creditor can collect this debt from you without first trying to collect from the borrower. Think about it: you are, after all, the only one with good credit.
4. Your relationship will suffer.
Co-signing a loan puts a huge strain on the relationship. As David Ramsey puts it, “Imagine Thanksgiving dinner if you’re sitting there next to your child after making a year’s worth of student loan payments because she couldn’t or wouldn’t pay. Imagine the resentment on your part. Imagine the guilt and shame–or worse, entitlement—on her part.”
5. You may end up doing more harm than good.
Co-signing is often another sign of overprotective parenting. Research shows that the more helicopter parenting you do the less satisfied college students feel with their lives. Simply put, co-signing a loan could hurt your child more than it helps. To learn more about helicopter parenting check out my post: College Admissions: How to Be Anxious for Nothing.
What’s the lesson?
If you allow peer pressure and false guilt to dictate your actions, you could end up inheriting your child’s debt burden. And if that happens there will be enough shame and blame to go around.
Remember, co-signing isn’t some sort of grand gesture. It is a serious long-term commitment to take on your child’s financial obligation if they stop doing so, which happens more often than you’d think.
If, for whatever reason, you agree to co-sign a loan, make sure you can afford to lose the full amount without adversely affecting your finances and losing your joy.
According to recent headlines, New Jersey’s Student Loan Program is ‘State-Sanctioned Loan-Sharking’. What about the student loan program in your state?
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- College Admissions: How to Be Anxious for Nothing
- What You Need to Know About Financing College
- Apply Now and Figure Out How to Pay Later
- The Biggest Financial Aid Mistake You Don’t Want to Make
New Jersey’s Student Loan Program is ‘State-Sanctioned Loan-Sharking’: “The loans have extraordinarily stringent rules, aggressive collections and few reprieves, even for borrowers who’ve died. The head of the loan agency was appointed by Gov. Chris Christie.” ~Annie Waldman
New Jersey Legislators Move to Reform Aggressive Student Loan Program: “The move is the latest action to rein in the agency, whose loans have left families financially ruined.” ~Annie Waldman
Smart Money Smart Kids: Raising the Next Generation to Win with Money: “In Smart Money Smart Kids, financial expert and best-selling author Dave Ramsey and his daughter Rachel Cruze teach parents how to raise money-smart kids in a debt-filled world.” ~Amazon