The default rate for some student loans is now the highest it's been in 17 years. And for parents thinking about co-signing on a student loan, should consider some important facts first.
Steve was forced to take over payments for his son's student loans when the payments, interest and tight due dates became too much for the recent college grad. Steve had co-signed for his son's student loan and didn't want it to go into default, tanking both of their credit ratings.
"I had to rethink my whole financial situation whether I could retire will I have to work more? It, it kept me up at nights," said Steve.
A whopping two-thirds of undergrads now graduate with student loan debt. A total of $1 trillion currently waiting to be paid back. But will it be? For the first time ever, the student loan default rate now exceeds credit card delinquency rate.
"Unemployment is high, average interest rate at graduation has increased. The amount of debt each year increases, making it much more difficult for students to be able to afford their student loans," said Mark Kantrowitz with FinAid.org.
If those loans are private, more often than not, there's more than one signature on the bottom.
"More than 90 percent of new borrowers have a cosigner on their student loan, that's up from less than half before the credit crisis," said Kantrowitz.
Experts warn it's a recipe for disaster for students and parents.
"Parents are basing their decision to cosign upon the traditional view that when you went to college your earning power was exponentially greater than if you didn't go to college, and that rationale no longer holds," said Attorney Ann Margaret Carrozza.
So what options do you have if your child defaults and you co-signed? Carrozza suggests you contact the lender immediately and ask for:
- An interest rate adjustment
- A deferment (this gives you a temporary reprieve from the payments where the interest does not accumulate)
- Or a forbearance (the payments are temporarily suspended but the interest still accumulates)
No matter what, a default can put a lot of stress on a family.
"When a student defaults and a parent is called back from retirement to go back to work to make these payments it's certainly not a good chapter in the parent child relationship," said Carrozza.
Steve says he didn't think co-signing on the college loan would have this result, but he has no regret.
"If I didn't do it and he didn't pursue it I'd feel guilty maybe that he didn't get the education he wanted or deserved," said Steve.
Experts say families should be sure they've exhausted all federal loan possibilities before taking out a private student loan. Some advise parents to take out a home equity loan to help pay for college or to help pay off a student loan. Experts say it is usually difficult to get student loans dismissed in bankruptcy court.