What’s in a name?
Well, when it comes to a loan, kind of a lot. When you take out a loan and sign your name to the document, you assume responsibility for paying that loan off. This is true for all types of loans including housing, auto, and student loans.
Student loan debt is among the most severe type of debt facing Americans today. In fact, it is the second-highest form of debt, trailing only mortgages and racing past credit cards and auto loans. This causes a lot of stress for students and parents as well.
As an advisor, you may find that many parents of college-bound kids attempt to assume all or some responsibility for the loans incurred by their children. While this often comes from a place of love and support, it is important that they and their children know that their child, whose name is signed on the dotted line, is the one ultimately responsible for their student debt.
While the student has the largest responsibility for their debt, that doesn’t mean that parents don’t play any role in the process. Advisors, as you navigate this tough discussion encourage your clients to think through a few things.
Student debt vs retirement
Parents dipping into their retirement savings to fund education costs can actually cause more harm than good. As the saying goes, there is no loan for retirement. Retirement relies on your personal savings vehicles and other supported programs that you have spent time, energy, and money to build.
Remember, your financial goals and wellness matter. Retirement is one of the biggest savings goals of your life and it is important that you not sacrifice your present savings as it could harm your future wellbeing. By forsaking some of your savings now, you could also put yourself in a position where you need to rely on your children financially which can cause strained family dynamics.
This really comes down to financial priorities and working to organize your financial life in the most effective and efficient way possible. When it comes to finances, it may seem like everything is essential and while retirement and education are both wonderful goals, it is important to set and follow through on the expectations you set for the many financial priorities in your life.
The option to cosign
Should your students need to borrow more money than the federal limit allows, they would need to turn to private loans from an outside lender. These loans tend to carry stricter credit and income thresholds, enlisting the need for a cosigner. In fact, MeasureOne found that 94% of undergraduate private student loans had a cosigner in the 2015-2016 term.
Cosigning on a loan could be a good way for parents to help their children secure the money that they need, but it doesn’t come without a price. When you cosign a loan, you become responsible for the balance should the student not be able to pay. This legal implication is important and could harm your credit if the payments aren’t made consistently and on-time.
After 3-4 years of consecutive and reliable payments, you can petition to have your name removed from the loan. This is a complex process that examines the liability of the loan and the credit of the borrower.
Apply for a Parent Plus Loan
A Parent Plus loan is a federal loan designed to help parents cover the costs of education for a dependent. This loan needs to be considered gingerly as it has many implications, namely that the loan will always remain in the name of the parent, and can never be transferred to the student even after they graduate. Interest rates vary each year and the current fixed rate for the 2019-2020 term is 7.08%.
Offer support in other ways
Love doesn’t always have to come in the form of signing on the dotted line. There are so many ways for parents to offer support to their students. Let’s take a look at a few.
- Drive up to school and take them to dinner.
- Help cover additional expenses such as books, gas, groceries, rent. This could help them save on cash in the meantime and save it up to repay their debt.
- Give them some money to repay loans when you can. You can supplement that as a birthday present or make it apart of a holiday gift or special occasion. You can help out significantly without taking on the full burden of the responsibility yourself.
- Be there for them and include them in your meetings with your financial advisor. This space can give them a forum to ask their questions and get professional help from someone your family knows and trusts.
So when it comes to student loans, names become important. The responsibility of the loan rests on the person who is signing it but that doesn’t mean that student loans aren’t a team effort. There are so many ways for parents to get involved and help their kids understand and manage the responsibility that comes with paying for education.