The dangers of co-signing a grandchild’s student loan

Though good news for many, President Joe Biden’s recent student loan cancellation moves highlight an enormous problem. Student loan debt in this country now weighs in at $1.7 trillion, and it generally takes the average student more than 20 years to repay their loan.

It’s no wonder grandparents want to help their grandchildren pay for college. And a lot of them do: The Department of Education recently reported that close to 9 million Americans over 50 have student debt. Betsy Mayotte, president of the Institute of Student Loan Advisors, says that Americans over 65 are the fastest-growing population carrying student loan debt.

Offering financial assistance with higher education seems like a well-intended and loving act, but when it comes to co-signing a grandchild’s student loan, clients need to understand:

• Any loan they co-sign will show up on their credit report. Once grandparents co-sign a loan, that debt belongs to them as much as it does to their grandchild.
• Late payments will show up on their credit score. If a grandchild doesn’t pay on time, any co-signers are negatively affected as well. They could be subject to collections, lawsuits, wage garnishments, and even liens on their bank accounts.
• Taking over payments can have unintended consequences. Some co-signers might be tempted to take over payments to preserve their good credit, but that could make it easier for students not to pay it themselves. After all, owing Grandpa and Grandma is different than owing an institution.
• Older people with student loans can be more likely than those without such debt to forgo necessary health care. A 2017 report by the Consumer Financial Protection Bureau states that older co-signers are more likely to do without doctor visits, dental care and prescription medicines because they couldn’t afford them.

But what if a client has already co-signed a student loan? First, I would suggest they monitor their credit carefully. Co-signers are not always notified when a payment is late. In fact, they may not be notified until the loan is well into default, such as when they receive a collection letter or lien notice.

Unfortunately, defaulting is not uncommon: According to the CFPB report, almost 40% of federal student loan borrowers 65 and older are in default. And that can lead to bigger problems, as the federal government can offset other benefits to repay a federal student loan, including Social Security.

Other options

If it comes to a default situation and the grandparents can’t afford to deal with it, they have several options. They can ask their grandchild to reimburse them for any payments, to be released from the loan, or both.

They can explore a settlement for private student loan debt.

And as a last resort, they can declare bankruptcy. There’s a pervasive myth that student loans cannot be reduced or forgiven through bankruptcy, but a study published in the American Bankruptcy Law Journal in 2011 found that 40% of student loan debtors obtained some relief through bankruptcy. More recent data from 2019 showed that increased to more than 50%, according to the study’s author, Villanova University law professor Jason Iuliano.

Of course, none of us want our clients to go bankrupt or go through any financial hardship. That’s why it’s important people know what they’re getting into when they co-sign a student loan, and how that risk plays out for many over-65 debtors.

There are other ways for people to show love for their grandchildren, and even to help finance their higher education — perhaps with a trust where appropriate, without putting themselves at risk.

Ken Moraif, CFP, CRPC, is a senior retirement planner at Retirement Planners of America and author of “Buy, Hold, and Sell!”