If you listen to Suze Orman, you repeatedly hear her advice not to co-sign a loan for someone, ever.
Co-signing a loan can be a dangerous practice. If the other person stops paying, you are on the hook for the payment.
If you help your girlfriend buy a car by co-signing and she leaves you and takes the car and stops making payments, guess what, you need to keep paying if you don’t want your credit affected.
Co-signing for friends and relatives can often lead to the end of a relationship.
Most argue that it isn’t worth the financial or personal risk to co-sign.
Co-Signing for Private Student Loans: A Different Issue?
One gray area is cosigning private student loans for your child to attend college.
Sometimes these loans make it possible for the child to attend the school of his choice, and it can be hard to say no. While you may think that your child will pay back the loans, you need to realize you will be making the payments if your child cannot, whether he is not making payments because he is irresponsible or because he does not make enough money or can’t find a job.
A Hidden Risk of Co-Signing for Private Student Loans
That may be a risk you are willing to take, but did you know that if you co-sign a private school loan for your child and your child dies, you are still responsible for the payments?
This revelation came to light recently thanks to Ella Edwards, a woman who cosigned a private student loan for her son, Jermaine, to attend college. When he died at age 24, the 61 year old seamstress was still held accountable for the payments on his $10,000 private student loan. However, his two federal loans were dismissed just a few months after his death.
Many will argue that this is an inherent risk of co-signing. You may be responsible for payment, even if you gain nothing from the loan. The rules are the rules, they say.
While co-signing a loan is taking a risk, if the recipient of the loan is no longer alive, should his mother have to pay? There is no tangible object left for the loan. Her son is no longer here to use his education and increase his salary. She has nothing left; if she cosigned for a car and her child died, she would still have the car to sell to help her pay off the loan.
Is The System Broken?
Many say that our student loan system no longer works. Students leave college saddled with debt that they cannot pay, or if they can, they cannot pay it off for 10 to 25 years without significant sacrifice. The salaries these recent graduates can earn do not keep pace with the soaring price of a college education. Some even argue whether it is worth it to attend college.
Now, with the revelation of Ella Edwards’ struggle to pay her deceased child’s student loans, we see one more way that the student loan system seems to be broken. Did Ms. Edwards know that she would have to pay this loan if her child died?
The chance of a college graduate dying before he is able to pay his student loans is not that great. Couldn’t the loan company show some compassion and forgive the $10,000 loan of a deceased student? Isn’t that the least that can be done for a grieving mother? Is the pursuit of profit so great that it is impossible to forgive a loan for a diseased person?
What do you think? Should Ella Edwards be responsible for her deceased son’s student loan payment, or should the loan be forgiven?
Hmmm, It is a grey area, but I won’t be surprised if the company who owns the loan is one of the many greedy corporate America companies that put profit above welfare. The other flip side is hoping this will serve as a lesson to people who are quick to sign without finding out the repercussions of their co-signing. Never ever co-sign even for your spouse . If you need a co-signer, then you can’t afford it and probably shouldn’t dabble into it. If I knew the mother, I would advice she shouldn’t pay and let them take her to court, why because she probably can’t afford to pay. This is also evident in the Federal government forgiving the other loans. If we say rules are rules and no bending of the rules, then every one of us should be in jail because we at some point have stolen, lied and broken the rules. I am sure the company in question would have broken the rules and gotten away with it or bent the rule in their favor. Talk about bending the rules to pay little or no taxes.
I sell private student loans for a major bank in Canada. They are a great way for students to finance their education and 90% of students will need a cosigner.
However I always recommend that the student have some sort of life insurance. Either they take out a term policy with another company or I can sell them credit protection which will pay off whatever is owned in case of death.
For students either option is incredibly cheap. For a 10k student line of credit a 20 year old would be paying about $2 a month.
It’s all about being responsible. I have no pity for the women paying her son’s loans. She should have taken out insurance on the investment in his education.
DC @ Young Adult Money says
My heart is saying that she shouldn’t be responsible, but my logical side is saying she should be. It’s a terrible situation to be in, and the only solution I can see fixing this going forward is some sort of insurance against this sort of situation (i.e. life insurance in the amount that you cosign for in case they pass away).
This is one of the biggest problems with loans in general – yes, if you cosign on a car and the other person dies, you can sell the car. However, education was never a “tangible” in the first place: knowledge is important, applying knowledge is valuable – but they are not tangible in any form. Loans against intangibles are among the worst things someone can get involved with (I should know – I only had to take loans on ~60% of my college time, but even after 6 years, I’m still paying … and will be for several more).
Had the mother taken a loan on her own for the college education, it would have been much better…still a problem if her child passed away, but she would have gone in with no expectation that he would ever be helping to pay it off.
As it is, though, she’s in this situation – and as much as it pains me to think of the passing of her son, she should still be responsible for what she agreed to pay.
Here’s the thing – some lenders do offer ‘forgiveness’ of student loans in the event of death or severe disability. However, even in this ‘forgiveness’ scenerio, you are not getting off scott-free. If 65K was owed on the loans, and you are forgiven in the full amount by the lender, you must pay taxes at the end of the year as if you were gifted 65K. Granted, thats going to be a smaller amount than paying the full loan, but it’s still a lot of money.
I have to wear two hats in my response. Firstly, I’m a retired bank loan officer and have been exposed to the above scenario many times. The co-signer has a legal obligation to pay if the primary borrower can’t. It seems rather odd to me, that this mother didn’t have some form of life insurance already in effect for this son. Granted, the mother wouldn’t think about purchasing a cheap term insurance policy; after all, the son was only 24 years of age, and expected to live for many years. It’s easy to feel that she should have the debt forgiven, but the lender has rights as well. Secondly, as a parent of three children, I co-signed a student loan for one of my sons, who has since paid it in full. Had he defaulted, I would have assumed the payments myself, with no regrets. I did have a separate life insurance policy on him since he was one year old. I wonder how one would react if a child had just completed medical school, and couldn’t pay those loans which average around $200,000.00??? Just my 2 cents.
Damon Day says
Never consign for a private student loan. In fact you should avoid private student loans at all costs. They are not even dischargeable in bankruptcy in most cases. Currently the laws are such that you have very little options if you are unable to pay your loans back. The student loan system is a huge trap for individuals just getting started in life and their parents who unfortunately feel an obligation to co sign for the loan.
Parents: if you want to help your kids, you have a responsibility to fund your retirement so that you are not a financial burden to your kids later in life when they are trying to support their own families.
Irene Holmes says
I agreed to co-sign for a$7000 student loan with my daughter, however, an insurance policy for her was also taken out for the amount in case of death, and I’m listed as the beneficiary. It’s a very small amount per month for the peace of knowing it would be covered.