Money Talks, So Should You

Ask Jane: I co-signed my son’s student loan and he can’t repay. What now?

Jane Bryant Quinn
by Jane Bryant Quinn, Dimespring Contributor  (@janebryantquinn)

You’re going to have to repay that loan yourself. The single best move is to call the lender as soon as you know that your child is in financial trouble.

If you agree to have payments deducted automatically from your bank account, the lender might modify the loan, says Mark Kantrowitz, publisher of FinAid.org, a financial aid site.

READ: How to beat the most common post-grad money mistakes

“Lenders are more flexible when parents offer a steady source of payments,” he says.

They might reduce the interest rate or wipe out delinquencies in your child’s credit record, not to mention your own. When your child defaulted on the loan it showed up your record, too. That’s the risk co-signers take.

If you can’t pay, the lender will come after you big-time. The further you get behind, the more you’ll owe in interest and late fees, and the more you’ll be harassed by debt collectors.

A request for a co-signer on a private loan puts parents, grandparents and other close relatives into a terrible bind. You want the very best for your children, including a higher education. When they’re begging for your signature, how can you say no?

But there’s no guarantee that your child will be able to repay the debt when school ends, especially if he or she leaves early, without a degree, or chooses a school that requires large new loans every year. The child might get a low-paying job, or lose a job, or get sick, and default on payments. He or she might rack up other debts, skip the student-loan payments and not tell you until you get the first notice in the mail. (You wouldn’t be the first parent to find out this way.)

READ: The student loan bubble is about to burst

As a rule of thumb, your student should borrow no more than he or she can expect to earn in the first year out of school. Even that might be a stretch. A student who completes a nursing degree can expect a pretty good starting salary. A social work major might join a city agency or nonprofit with lower pay.

In truth, the route to affordable college loans is not your child’s salary after school. It lies where he or she decided to go to school in the first place. “Expensive “dream” schools are nice, but young adults will regret it if their loans damage their life options after they graduate. A school with the lowest net cost  probably a school in your state — is usually the best choice.

Jane Bryant Quinn is a nationally known commentator on personal finance, with books and columns read and trusted by millions. In her long career, she has established herself as America’s most reliable voice for people trying to manage their money well. Read more of Jane's articles here