[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.
Thanks for writing this, Lauren! Very timely and interesting post. My concern is that the federal student loan program will become less generous over time and more and more students/parents will have to rely on the private student loan option! As parents, we should cosign only if we are prepared to pay off the whole loan!
Thanks so much for having me!
Hi Laur,
I retweeted this and will be rotating it in my buffer account for a week!
It angers me so much to see these statistics. How many generations are being gutted by bad governing, bad politics, bad choices and greed.
It’s ridiculous in North America. Meanwhile there are countries (i.e. 🇫🇷) where college is 💯 % free.
The drip drip decay still underway in our culture. The millennials are fighting to get themselves on a firm financial footing AND my generation is having to step up (if we can) and give the a leg up.
I can see now why my grandparents were so tight. They were saving their money to pass down to their children. In our family we were lucky that way but I see devastation financially all around.
Thanks for writing this!!
Brent
Thanks for sharing! Yes, there are still countries where you don’t have to get into debt to go to college. I benefited from that too. Cheers!
Hi Brent,
Thanks so much for sharing my post!
I totally agree. I think millennials are heading into more of an alarming situation with student debt growing and the lack of personal finance education around the country.
I hope that I can save up enough to help my children out when that day comes!
Best,
Lauren
This is such an important thing to mention. I don’t think it’s worth shooting yourself in the foot to help your kids out. My parents helped foot the bill for my very expensive private degree, even though it probably wasn’t the best decision for them. Everyone is affected by these loans. If we can’t find a better solution to these incredible debt loads, we’re in for some trouble.
That’s a tough call when you’re in a family that for generations HAS passed their wealth down to their kids. If I had a choice between my children’s financial well-being and me going down to Palm Springs every year I would choose the children. 🙏🏻
We will try to do the same for our daughter. If we can still afford it in 10+years… 🙂
It definitely is a tough call. I guess it really varies from family to family depending on how much they can comfortably contribute.
I have a feeling that by the time my son, who’s a year and a half old, gets to be college age, community college at least will be free nation-wide. I see some states and cities have already done this, so it’s just a matter of time.
Thanks! Yes, that would be nice. I’m just afraid that by the time our daughter will go to college that program has already run out of money. But it would be nice, for sure, if Little Mrs. ERN could go to college for the first two years for free, or almost for free! 🙂
Cheers!
Thanks for the comment Tim! I agree that community college will probably soon be free. Heck, even 4 year colleges could have been free if Bernie Sanders was elected!
Haha yes and then we’d be taxed at 50%. At least you have a choice to take on debt to fund an education, but you wouldn’t have a choice to pay a 50% income tax.
Reading this makes me happy to pay a lot of taxes in exchange for almost free education (and a decent basic health care system)
It’s a trade-off, for sure! Maybe we should send Little Mrs. ERN to Belgium for college! 🙂
The Netherlands would work too ;-). But it is also rapidly changing, unfortunately. By the time that Miss CF might go to college or university, in about 14 year or so, I have no idea if it still will be affordable. We did start and index fund for here to help cover the costs by that time.
That’s a concern, too. Let’s cross our fingers that all the high-quality universities in Europe will remain low-cost!
I can recommend a few in my area.
This is scary – rather than being ahead a generation (when parents can easily help with college and their kids graduate debt-free), this puts a family behind a generation.
Thanks for the guest post Laur – congrats on graduation and best of luck!
Thanks Paul!
Hey Mr ERN and community.
My wife and I know all about student loans since our Doctorates costed us a pretty penny (350k+ combined). Lucky for our parents (or unlucky for us) that our parents aren’t on the hook for any of it. We make a good income so we will have no problems paying it off, but the cost of education is just absurd. My view of traditional education has totally changed and quite honestly, I’m not sure if I’d want my kids to go through the normal college route. If they did, I’d have to warn them to think it through and choose the right career path for them before committing 50k+ of tuition. There’s so many ways to make money nowadays that having a degree isn’t always necessary. If, and only if a career path requires certain degrees or higher education, then yes I’d be all for it. Instead of saving money for college for my children… I’d rather invest that money in real estate and pass on property to them…
Ouch, that’s a big chunk of student loan debt. And good for you (and your parents!!!) that you can pay off that big mountain of debt. And: agree with the notion that there are different routes to riches aside from the expensive colleges and universities!
Whoa, that sucks. We’re saving quite a bit for our kid’s education and I hope scholarship/Federal student loan can cover the rest. I’d hate to cosign on a private loan.
One of my cousins is going to a college in Germany. I think the tuition is free so that’s an awesome deal. As for our kid, we’ll see how it goes.
Same here: We’re saving in a 529 for our daughter. That may finance a large part of her college bill. How do we finance the balance? Hopefully some combination of scholarships and government student loans. If they are still available in 2030. I would hate to get into the private student loan business!
Thanks for stopping by, Joe!!!
This is an interesting situation for high income earning parents that spend/save nearly their entire income and put off saving/didn’t save anything for their children’s education. At a certain point the government says “Hey you’re parents make $250,000 a year so you’re going to have to figure out on your own”. Puts the kids and family in a tough situation. Definitely worth just a little bit of planning and family communication early on.
Jordan @ New Retirement
Yes, agree! College planning for FIRE kids will be an up and coming topic soon! ChooseFI.com is a great podcast and will deal with this topic more in the future!
I wish more parents would plan more for their their future. You can’t take out a loan for retirement.
I think it’s unfair for ‘rich’ kids not to get financial aid if their parents choose not to foot the bills the college feels they can afford. Of course I hold the parents more than the college to blame in that case. (Don’t know what to say about colleges where they acknowledge your family can’t afford it all but they won’t offer enough aid to keep one out of the hands of expensive lenders.) My ‘poor’ parents’ finances enabled me to get through college cheaply enough I could pay it myself with a few guaranteed student loans. Richer than they were, I’ve planned to fund my kids through even an expensive college, even if it delayed my retirement. Of course that may also be the reason why I only had two kids!!! But I have very wealthy (I think) friends who planned only to fund a state school expense for their kids (and had 5 kids 🙂 ).
My oldest begged me to cosign for her to go to an expensive far from home college. She ended up meeting her future husband at the college 10 miles from home and saving $80,000 in debt in the process
Aw, that’s so nice. Life works out in mysterious ways. That $80 is a down payment for a nice house!
That’s exactly what I told her $80 grand is a nice small house in this area, “I am not going to enable you to have a house payment when you graduate as a student loan”