We all know that young people should show respect for their elders. In return, those elders should extend all their resources to the up-and-coming generation. Right?
A risky move
"Tempting as it may be to co-sign a loan for your grandchildren, doing so exposes seniors to significant risk," Todd Campbell, owner of EBCapitalMarkets, warned on Motley Fool. "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."
With Reuters describing millennials as facing the greatest risk among all U.S. age groups for defaulting on their loans in 2017, that danger is real. So is the possibility of a reduced income for baby boomers who've co-signed those loans, Campbell noted. "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," he wrote.
And if older co-signers assume they'll never need to take over payments on the loan, they could get hit hard, according to the Consumer Financial Protection Bureau. "As a co-signer, you're not merely vouching for someone's ability to repay a loan; you're taking full responsibility to pay back the loan. If the primary student loan borrower stops paying the loan, you're responsible for making the monthly payments."
According to CFPB, in the past decade the number of older student loan borrowers quadrupled and the amount of debt per older borrower approximately doubled. In 2015, nearly 40 percent of federal student loan borrowers age 65 and older were in default.
"It is alarming that older Americans are the fastest growing segment of student loan borrowers," former CFPB Director Richard Cordray stated. "Many of these older Americans are helping to finance their children's or grandchildren's education while living on a fixed income. We are concerned that student loans are contributing to financial insecurity for many older Americans and that student loan servicing problems can add to their distress."
From 2005 to 2015, the number of Americans age 60 or older with one or more student loans quadrupled from about 700,000 to 2.8 million, according to CFPB analysis. And the average debt owed by an older borrower roughly doubled from $12,000 to $23,500. Juggling debts and later-life expenses on fixed incomes can prove difficult and an increased number of physical and cognitive impairments can limit an aging borrower's ability to stay in the work force.
Industry practices for reclaiming student loan payments are another headache, according to CFPB, from harassing phone calls to the co-signer when the loan originator fails to pay to delaying or denying co-signers' ability to enroll in reduced payment plans if their income plummets.
The bottom line: co-signing a college loan when you're in your 50s or 60s is not a good idea. "It's okay for you not to co-sign for the kids," Santa Barbara financial planner Andrew Anable told the 30secondsMom blog. "It sounds harsh, but the kids need to know this can impact your retirement as well as your credit." If you do opt to sign for some part of a college loan for a child or grandchild, keep the total loan amount below half of one year's income, Anable advised.
What to do if you're already stuck paying back loans
If you're an older borrower who has already incurred student loans on a millennial relative's behalf and you find yourself on the hook for repaying them, the CFPB offered these four tips for helping baby boomers navigate common problems with student loans:
- Exercise your right to apply for a repayment plan based on your income. CFPB noted that it received numerous complaints indicating certain student loan services don't tell borrowers about the option to request lower payments if they've had a drop in income. "The Department of Education offers numerous plans to borrowers with federal student loans, including most Parent PLUS borrowers, that help make payments more affordable, including 'income-driven repayment' (IDR) options that can set your monthly payment based on your income." To start an IDR plan, enroll at StudentLoans.gov or contact your loan servicer about enrolling.
- Check into co-signer release options. When you first co-signed the loan, if your lender promised an opportunity for you to be released after reaching a set number of timely payments, see where you stand. For more information, check out the CFPB's consumer advisory on release options.
- Request access to account information. If you're in the dark as to what's going on with the loan repayment plan, you are allowed to request access to account information even though you're not the primary borrower. Keep in mind that missed payments can have a negative effect on your own credit rating, even if it's a surprise to you.
- Register a complaint if your protected benefits are at risk. "Social Security benefits are protected from offset for delinquent or defaulted private student loans." Don't cave to the harassing collection tactics and threats some loan servicers may try when the primary loan recipient fails to pay. "Your Social Security benefit usually may only be offset to pay back an outstanding debt to the U.S. government, like a federal student loan. Debt collectors may not offset your Social Security benefit in order to repay a private student loan."
In any of the above cases, the CFPB can assist consumers with submitting a complaint and receiving a timely response.
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