There she is. Your first-born. The one who changed your whole world.
You watch her stand behind the lectern and deliver her well-deserved Valedictorian speech to her classmates, teachers and school administrators. Your heart swells with pride and tears careen down your cheeks. You listen intently as the sweet voice of your little angel says …
“Daddy, will you please cosign for my college loans?”
Wait. What just happened?
Sure you prepared. You put money away, but time is up and the returns, well — are not. So, being the dutiful parent you are, you scrawl your name across dozens of forms filled with guidelines and notices and disclaimers. Eyes too blurry to read through them all. Mind too tired to really care, as long as you keep your promise – and her dream – alive.
Well, congratulations. You’ve just agreed to repay these loans on your child’s behalf if she’s not able to herself.
Of course she’ll be able to repay them, right? She’s going to do great things with her education. Money will not be an issue. That’s the whole point of this, after all.
Hopefully you’re right. But for Steve Mason and his wife Darnelle, things didn’t work out as planned.
Steve had cosigned for $100,000 in private student loans his 27-year old daughter Lisa took out to attend nursing school. Then tragedy struck when Lisa suddenly died of liver failure. Steve and Darnelle immediately took in Lisa’s three children and are now providing financial support for their grandchildren.
And to make things worse, the banks kept sending the student loan bills. Only now, to him.
CNNMoney’s Blake Ellis wrote recently wrote an excellent article about the Mason’s plight, including updates on the couples fundraising efforts in place to repay their daughter’s student loans.
Banks want their money back — regardless.
They’re funny that way. Or cruel – if we’re being honest.
And sadly, you’re the one on the hook if you cosigned for the loans.
Sure, you could try to negotiate with the banks for a principal or interest rate reduction, like Mr. Mason did. This could help buy you time. But without substantial savings or other assets, you may find yourself making loan payments well into your own retirement.
What exactly is a cosigner?
If you find yourself wondering about the rules of student loans, you’re not alone. Student loan jargon can be confusing for many parents. Fortunately, there are many good resources available to help us make sense of this new world we find ourselves in. This helpful post from College Financial Aid Advisors is a good place to start.
A cosigner on a student loan is similar to that of most loans, such as automobile loans or mortgages. The cosigner accepts equal responsibility for repaying the loan. Most banks require the following of cosigners for student loans:
- The cosigner must be at least 18 years of age.
- The cosigner must be a US citizen or permanent resident.
- The cosigner is subject to a credit check.
And even though we are talking about cosigning for your child’s student loans, most banks do not require the cosigner and student to be related.
Sign up for Term Life Insurance 101.
No parent should have to grieve the loss of a child. The last thing we would want to deal with in addition is a bank breathing down our neck.
A term life insurance policy on the life of your child can provide the funds needed to repay private student loans in the event of a death.
Make sure to set up the policy so you are the policy owner. This allows you to control specifics of the policy such as the beneficiaries, premium payments and address changes. You don’t want your child to have the ability to change the beneficiary or anything like that. Not that she would, of course. Because college students never act on impulse, right?
You’ll also want to name yourself as the primary beneficiary and your spouse or a trust as the contingent beneficiary. This will ensure the proceeds are paid to you or another family member, and can be used to pay off the student loans.
The life insurance company will ask you about your insurable interest in this policy. In other words, what financial loss would you suffer from the death of the insured person. Since this is for student loan repayment, be sure to maintain good records of all cosigned loan documents and bank statements, if the loans are in the repayment period.
Finally, structure the policy to match the repayment terms on the loans. A new policy can cover periods of 10, 15, 20, 25 or 30 years. American General Life’s term policies can even be purchased for odd term periods such as 17 or 22 years.
Policies for young, healthy people are very inexpensive.
Aww, youth is often wasted on the young, in so many ways. But in this case, it’s going to save you some money! That’s because term life insurance is practically dirt cheap for college-aged people.
Here’s the breakdown for a $100,000 / 10-year policy:
- Male, age 20: $7.18 per month with Protective Life
- Female, age 20: $6.92 per month with Protective Life
Even if we up the coverage to $250,000 / 20 years, premiums still rival the cost of a weekly latte:
- Male, age 20: $13.12 per month with Banner Life
- Female, age 20: $12.03 per month with Banner Life
Your new plan starts here.
The first step you should take is to consult a qualified financial aid advisor. Find out what options you have before applying for loans. There may be money available from other sources that you haven’t considered.
If your plan does include loans, be sure to ask about the differences between government-backed loans, such as Stafford Loans and SallieMae Loans, and private loans. There may be different repayment terms and cosigner responsibilities for each. A website like StudentLoans.gov is also a good place to do research.
Once you have an idea of what loans you’ll need, the total loan amount and the repayment terms, you can then check prices on a new term life policy.
The next time you’re faced with a mountain of student loan forms, and the thought of one more application is enough to make you foam at the mouth, just remember: You’ll feel more at ease if you take the time now to protect yourself, your credit and your promise.
Sources: CNN Money, College Financial Aid Advisors