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Why Co-signing Loans is the Best Way to Close the Gap on the College Bill

Jul 18, 2018

Why Co-Signing a Private Loan Can Be the Best Way to Close the Gap on the College Bill

We want the best for our children which means we want the best college for them. They worked so hard but are a little – or a lot – short of affording their dream school. Don’t fall into the parent trap of borrowing heavily for college at the expense of your retirement. You can help them without hurting yourself. Here’s how to find the middle ground.

Start by framing the discussion like this: college loans should be the last resort, not the first option. First, look to savings to reduce future debt. Even if you start late in high school, it’s ok because bills will continue to arrive four or more years down the road. Next, look for free money: gifts from relatives, grants and scholarships that do not have to be repaid.

Finally, determine if you or the student can contribute earnings (via a payment plan) while the student is in-school racking up those bills. When savings plus free money plus current income exceeds the cost, no loans are necessary. Be sure to account for all four (or more) years the student will be a college student, if there is a gap between expected cost and available resources, then it’s time to consider loans. For most students, the Federal Loan program is by far the best option when you consider the interest rate and repayment terms. One problem: the amount that can be borrowed is capped.

Let’s assume that the student takes a government loan but a gap still remains between the cost of college and the sources of money. Now all eyes turn to you the parent for help.

Some things to keep in mind…..

  • Be VERY wary of the Federal PLUS Loan. Parents with marginal or bad credit may be eligible for a Federal PLUS loan, but be wary. The credit analysis used to approve a PLUS loan is minimal and the amount that can be borrowed is very high (the full cost of attendance), meaning it’s possible to borrow more than you can afford to pay back. Also, some parents falsely surmise that they will transfer their PLUS loan to the student in the future. That is not possible under the terms of the PLUS loan. It is a Parent loan, not a student loan.
  • DO NOT borrow from your retirement accounts to pay for your child’s college. It sure sounds good to “repay yourself” the interest that accrues on a loan rather than paying a bank, but it is a terrible idea. Why? Every dollar you withdraw from your retirement account is one less that can earn interest, dividends or appreciate to grow your retirement savings – and at a time when your retirement is fast approaching. Just as young families are instructed to start saving early to benefit from compounding, older savers should avoid touching the nest egg because you are running out of time to grow the account.

The Best Advice

Many parents with good credit can receive substantially lower interest rates on private loans from credit unions, finance companies or state agencies than the Federal PLUS program. Co-sign a private student loan and make sure it has a co-signer release. Many private loans now have a feature to permit you to be dropped from the loan once your child establishes their own good credit. With this type of college borrowing, you effectively lend your established credit profile to your child so they can be approved for a loan at a time they would not qualify on their own. Once a good repayment record on the loan is established, the student should contact the loan provider to release you, the co-signer, from future obligations to pay. Co-signer release is a terrific feature because it permits you to help your child borrow when they need your help. And for you to be released from that obligation when they get on their financial feet.

If you feel compelled to help borrow for a child or grandchild’s education, be sure not to imperil your future well-being. Co-signing a loan helps the next generation achieve their dream of a college education without imperiling your dream of comfortable twilight years.