Co-signing a daughter's education loan

Dear Debt Adviser,

Dear Kristin,
Your question has some implications for both the past and future. The future concern for a first-year debt of $10,000 leads me to expect second, third and fourth-year loans totaling $40,000. Your concern about your retirement indicates that you expect to be paying at least a part of the $40,000 yourself, based on past performance from the daughter.

I am sure that you have arrived at a loan amount of $10,000 after researching every other possibility, but just in case you did not, and for the benefit of my readers, let's quickly go through the process.

First, take advantage of the financial aid office at your daughter's school. They should be able to walk you through every possible way to squeeze out an extra nickel from federal loans, grants, work-study opportunities, loans in the student's name only and other means before seeking a private loan.

As you probably already know, for federal loans or grants you must fill out a Free Application for Federal Student Aid form and the College Scholarship's Services Profile is required by many institutions for private and institutional funds. What you and many readers may not know is that if you do not qualify for need-based funds the first year, you should apply again for the next school year. Your circumstances may change or eligibility requirements may change -- you never know -- and all it takes is the time to fill out the form(s).

Once you have explored all other options, a private or alternative loan may be worth consideration. As you have found out, students will probably not qualify for such a loan without a co-signer unless they meet certain criteria:

1. two years of good credit history;
2. status of U.S. citizen or permanent resident for two years;
3. at least $18,000 in annual income with full employment for two years.

Many undergraduate students are not going to meet the above criteria.

As you state in your question and as I have warned in other columns, you as the co-signer of a loan have to be prepared to make the payments if the loan defaults. In fact, I will share one of Bucci's maxims: "A co-signed loan is a defaulted loan. You just don't know it yet!" The corollary to this maxim is, "Any loan you make to a relative is really a gift. You just don't know it yet!!"

However, as you mentioned, many alternative loans have a co-signer release option available after 24 to 48 consecutive on-time payments.

What you have to decide, Kristin, is whether you are willing to make that kind of sacrifice/gift for your daughter to attend the school she has chosen.

My advice is to put pen to paper and find out if you will be able to afford college loan payments and the retirement that you have worked for and deserve. This is an animal with a long tail, considering your daughter will likely be in college four to five years at the minimum. If the answer is no, then you and your daughter will need to have a serious discussion about just what is involved with financing her college choice.

A number of non-financial options can be considered, such as attending a community college for the first two years or spending some time in the military to amass some college money from Uncle Sam, or even working while in school part time.

If you do co-sign a loan, make sure you shop around for the best deal and research that co-signer release option well.

Good luck!

The Debt Adviser, Steve Bucci, is the president of Consumer Credit Counseling Service of Southern New England. Visit CCCS for additional debt advice or click here to ask a debt question.

-- Posted: Aug. 20, 2004