Don’t co-sign on a student loan until you understand the full repercussions

Tuesday, August 6, 2013, 10:12 AM

Make sure you are making the payments so that you can keep track of the loan.


Often parents don’t understand that student loan debt is not dischargeable in bankruptcy.

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Q. My child is going off to college this fall and she will be taking out a student loan. Should I co-sign on the loan?

A. Yes, you should co-sign, but only after you understand the full repercussions.

With the cost of tuition going up every year, the use of student loans has also gone up. Student loan delinquency just surpassed credit card delinquency for the first time ever.

That makes co-signing a student loan a very difficult decision. Parents need to understand that by co-signing, they are ultimately responsible to pay back the entire debt.

Often parents don’t realize that a student loan is a very real debt. The name “student loan” makes it sound like it is a friendly loan. It is not a friendly loan at all.

Parents should know that a student loan is not dischargeable under bankruptcy law. You can have your mortgage, car loan, and credit cards all forgiven if you filed bankruptcy, but you would still be responsible to pay back your student loans.

You should assume that if you co-sign, you will be paying the entire monthly payment. Here are some of my recommendations:

*Don’t borrow more than you need.

*Have an emergency fund to cover six months’ worth of payments.

*If your child earns income as a student, make sure a small portion of that pay goes into that emergency fund.

Perhaps the most important tip I would give parents relates to who should be making the payments. While your child is the official borrower, I would encourage you to be the one sending checks to the lender. In turn, your child should be paying you.

Why? Parents need to monitor and control loan payments to protect their own credit profile.

Unfortunately, we have seen the devastating effects that missed student loan payments can have on parents’ credit scores. Most of the time parents are not even aware that there has been a missed payment until they apply for a loan themselves.

At that point, it’s far too late and the damage to the credit score has been done. A one-time, 30-day delinquency can drop credit scores by as much as 100 points.

Student loans have become a necessary evil in today’s world. A student loan can have a dramatic effect on the credit and monthly budget of parents and their children.

Often it is a young person’s first encounter with a credit obligation. It needs to be carefully considered.

Paul Oster is a credit expert and owner of Better Qualified in Eatontown, NJ.