[It’s a pleasure to introduce Laur (Lauren) Davidson today. Laur is a senior at the University of Pennsylvania majoring in English and Communications. She wants to build a portfolio as a freelance writer and agreed to write a guest post for us – perfect timing because the ERN family is on vacation this week! The post is on a very timely topic: student loans and how they threaten even the parents’ finances if they cosigned their kids’ private student loans. Take it over from here, Laur!]
Half of Parent Cosigners Facing a Shaky Retirement
By Laur Davidson, a soon-to-be graduated freelance writer for hire
The sheer magnitude of the mountainous $1.4 trillion of debt weighing down 44 million Americans is rightfully grabbing headlines as a looming financial crisis. The devastating economic and social impact of student loan debt on borrowers, their families, the communities in which they live and the nation is well documented. Less known, but no less devastating is the impact student loan debt is having on well-intentioned parents who are suffering financially for having helped their students by cosigning their private educational loans. With the number of students unable to repay their private loans increasing each year, more and more parents are having to rethink their retirement plans.
A Ticking Time Bomb
It is a problem that has been waiting to happen: The cost of a college education has been increasing at an astonishing rate for several decades, making it unaffordable for most families without taking on student loans. Where federal financial aid and student loans aren’t enough to cover the costs, students must turn to private loans.
Unlike federal student loans which have no credit requirements, private student loans issued by banks and other private lenders do. Most students cannot qualify for private loans, so they need to turn to parents or family members to cosign the loan and act as guarantors.
LendEDU data suggests that 90% of all private student loans need to be cosigned. Through 2016, there is more than $165 billion in outstanding private student loan debt owed by nearly 1.4 million student borrowers. Of that, 1.26 million parents are responsible for the repayment of $150 billion in loans.
Parents Caught off Guard
Consider the implications of that for parents who suddenly find themselves having to repay student loan debt at a time when they need to be saving for retirement. LendEDU surveyed 500 parents who have cosigned loans, and their personal outlook on their financial future is not very bright.
The purpose of the LendEDU survey was to gauge the parents’ understanding of the financial impact of cosigning their children’s loans. The answer to one survey question best sums it all up. When asked, “If you could do it again, would you still cosign on the student debt for your child?” 34% of the parents said they would not. About the same percentage reported that their child has made late payments on the loan which has negatively affected their credit score and ability to obtain a mortgage or new financing.
Putting Retirement in Jeopardy
The most startling revelation, however, is that 51% of parents feel their children’s student debt is putting their retirement in jeopardy. As guarantors of their children’s debt, parents must step up and make payments when their children cannot or they risk serious damage to their credit standing. Considering that many parents are well into their fifties or sixties by the time their children start repaying their private loans, it is a critical time to catch up on retirement plan contributions after 25 years of raising kids and paying for college.
Even without the additional burden of student loan debt, more than half of pre-retirees are having to delay retirement or drastically reduce their lifestyle, or both, due to their inability to save enough during their working years. Add in the cost of a private student loan that has been accruing interest and late fees on missed payments, and it’s clear that parents will be continuing to sacrifice well into their golden years.
Lessons Learned for Benevolent Parents
The best thing to come out of the plight of many parents is the valuable lesson that cosigning on a student loan, while seemingly the right thing to do, is fraught with the risk of long-term financial liability. When parents understand that they are completely responsible for repayment when the child cannot make payments, it should give them pause. The parents are not a backstop of a safety net for the child; they are unequal partners – unequal because the responsibility falls squarely on them, not the child. Parents also need to know that the lender is not required to inform them when the child falls behind on payments; yet, the missed payments can negatively impact the parents’ credit.
Finally, parents who are not on track to meeting their retirement income needs should consider whether it makes any financial sense to take on new debt at such a late stage; because that is in essence what they are doing if the child is unable to make the payments. Parents should first make sure they have exhausted all possibilities to maximize federal student loans. If additional federal loans are not available, they may be better off taking out a PLIS loan, which is a federal student loan issued completely in the name of the parents.
According to the LendEDU survey, nearly half the parents were unaware of the PLUS loan or other options available to at the time of repayment, such as having themselves released as cosigners if their child refinances the loan through a private lender. Parents can also be released as a cosigner if the student borrower has a history of on-time payments and is deemed creditworthy to continue the loan.