Baby Boomers Face Risks Co-Signing Student Loans
Getting a college education remains the single best way to make more money, but going to college comes with an increasingly steeper price tag. According to the National Center for Education Statistics, the average annual tuition for a college student has increased from $11,653 in 1991 to $19,339 in 2012.
Crunching data from The College Board shows that trend continuing, with average sticker prices for four years of college jumping 14% over the past five years. Spiking tuition is troublesome, but not just for students. Parents and grandparents are also at risk, because students are turning to them more often to co-sign student loans to pay their tuition bill.
As recently as a generation ago, that wasn't the case. Fewer parents paid for their children's college education, and since college was less expensive, more kids were able to finance it themselves. However, as the price of education has soared, so has the demand for co-signers. In 2008, 67% of private student loans had co-signers, but that number increased to 90% of loans in 2011.
Stormy weather ahead?
Stagnant wages and increasingly higher prices for commonly purchased items are tapping parents out, and that has kids turning to their grandparents for help. According to a recent study by credit reporting agency TransUnion, the percentage of people over 60 with student loan debt is on the rise.
About 5% of seniors have student loan debt, and roughly half of those borrowers are co-signing loans for younger family members, such as their grandkids. The amount of debt these boomers are carrying as they head into retirement has exploded from $14,696 in 2005 to $27,168 in 2014.
Tempting as it may be to co-sign a loan for your grandchildren, doing so exposes seniors to significant risk. Co-signing a student loan means that seniors are equally responsible for making payments when those loans come due, and those payments are going to put a significant dent in retirement income if the kids are unable, or unwilling, to pay. The average Social Security payment to retirees stands at $1,294 per month, but the average student loan payment on $25,000 worth of borrowing works out to about $242 per month, or almost 20% of the typical retiree's Social Security income.
Viewing our children and grandchildren through rose-colored lenses may make you think you'll never have to make this payment, but considering that few college-age students are good credit bets, it's wise to be cautious. According to CreditKarma, the average credit score for a person between 25 and 34 is just 628.
And while your grandchild may be different, the reality is that even the best youngsters may have a tough time making that loan payment. The unemployment rate among people younger than 30 years old is 6.2%, meaningfully higher than the 4.3% rate for those ages 35-44. Since the average wage of those working totals just $700 per week, and out of that amount comes rent, transportation, health insurance, utilities, food, dating, and other federally subsidized student loan payments, it's easy to see why people 39 and younger accounted for 59% of the $85 billion in past-due student loans in 2011.
Proceeding with caution
Make no mistake: You're on the hook if your loved one doesn't pay his or her bill on time. A lifetime spent building a credit score you can be proud of can be erased in the blink of an eye. Trust me. I know. My wife and I co-signed college loans for our son, who is also in the Navy Reserve. When he forgot to defer his loans during an active duty deployment, the delinquency was reported on both his and our credit reports, and our credit score tumbled by more than 100 points overnight. Equally eye-opening, we learned of the drop in our score when our bank froze our home equity line of credit. In our case, some quick phone calls and paperwork showing his active duty status cleared the matter up, but our experience shows just how big a risk parents and grandparents are taking when they co-sign.
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