In early August, I ran across a very sad excerpt on the Fox News website and it got me thinking about our Ensphere clients. This article talked about a California couple who cosigned about $100,000 in student loan debt for their daughter, Lisa. Lisa, who was 27 years old and had three children of her own, died unexpectedly from liver disease.
Lisa was making payments on her student loans until her
death. Unfortunately, the parents soon discovered that as cosigner, they were responsible
for repayment of the student loan debt, as they would be in any other loan
situation as cosigners. Lisa’s father states that the debt payments exceed
$2,000 a month and has destroyed his credit. One of the loans was forgiven by
the creditor, and some lenders have lowered the interest rate.
What can you learn from this tragic scenario? Let’s take a
closer look at the facts:
1) Buyer beware! There are many private student loan programs available in the marketplace. Almost every major bank and credit card company offers student loans which will allow you to defer loan payments until the student graduates. However, each program will treat cosigners and the death of a student differently. Some lenders will forgive the debt if the student dies, and some do not. Some lenders will remove the cosigners from the loan if the loan payments are paid on time by the student after 24 to 36 months, and some lenders do not.
2) Understand what you are getting yourself into! Parents and students do not fully understand what the loan payments will be after college. Remember, you are borrowing money every semester for at least eight semesters. Payments are usually deferred until the student graduates; however, interest is being charged and added to the loan during the time the student is in college. If you’re not keeping track of what you’re borrowing and how much it costs, you can easily end up with $100,000 to $200,000 in debt after a four-year college education. The payment terms are usually 120 to 180 months. Do the math. The payment will easily be in excess of $1,000 to $2,000 a month! Ask yourself, what will your student have to earn after taxes to be able to handle a four figure loan payment?
3) Understand how the interest rate is calculated. Some loan rates are variable, and some are fixed for the life of the loan. Some loans charge fees in addition to interest. You need to understand how interest is calculated and how often the variable rate changes. Fixed interest rates are usually higher than variable rates. Interest rates are currently at a historical 30-year low. Where do you think interest rates will be four years from now? If you choose a variable rate, understand how high and how fast interest rates have to increase before the loan will cost you more than the fixed rate option.
4) Are there alternatives to cosigning student loans? Parents usually have a better credit rating and have access to less expensive credit. If you have equity in your home, you may be able to refinance your mortgage or get a home equity line of credit. Interest rates are usually significantly lower than student loan rates with longer terms to pay back the debt making payments more manageable. Also, for most people, the mortgage interest is tax deductible. Student loan interest deductions have more restrictive limits and phase out with income. If you have cash value in your life insurance policies, you may be able to borrow from your policies at more favorable interest rates. Most life insurance loans also let you decide if and when you want to pay the loan back.
5) Protect your assets and credit! Consider a life insurance policy on your student that will cover any medical, debt, or other outstanding expenses that will need to be paid in the event of an untimely death. I know that most people do not even want to consider the thought that their child may die before them. But bad things happen to good people every day. Parents can own the policy and make payments on behalf of the student. When the student is of age and has the means to handle the payments, ownership can be transferred to the student. Many insurance companies have programs that allow the student to increase their coverage during the term of the policy without proof of insurability. So, you are protecting their insurability in the event that health problems occur in later years.
6) And above all, accept responsibility. It is not the government’s job, the college’s job, or the tax payer’s job to pay for college or bail out students and parents who get in over their heads. Every individual should plan ahead and educate themselves about the college funding process and the tools that are available to help pay for college expenses. Know what your payments and borrowing costs will be for your student’s education before you and your student commit to any loan. Determine how much you will borrow and how much the student will borrow for the next four years.
1) Buyer beware! There are many private student loan programs available in the marketplace. Almost every major bank and credit card company offers student loans which will allow you to defer loan payments until the student graduates. However, each program will treat cosigners and the death of a student differently. Some lenders will forgive the debt if the student dies, and some do not. Some lenders will remove the cosigners from the loan if the loan payments are paid on time by the student after 24 to 36 months, and some lenders do not.
2) Understand what you are getting yourself into! Parents and students do not fully understand what the loan payments will be after college. Remember, you are borrowing money every semester for at least eight semesters. Payments are usually deferred until the student graduates; however, interest is being charged and added to the loan during the time the student is in college. If you’re not keeping track of what you’re borrowing and how much it costs, you can easily end up with $100,000 to $200,000 in debt after a four-year college education. The payment terms are usually 120 to 180 months. Do the math. The payment will easily be in excess of $1,000 to $2,000 a month! Ask yourself, what will your student have to earn after taxes to be able to handle a four figure loan payment?
3) Understand how the interest rate is calculated. Some loan rates are variable, and some are fixed for the life of the loan. Some loans charge fees in addition to interest. You need to understand how interest is calculated and how often the variable rate changes. Fixed interest rates are usually higher than variable rates. Interest rates are currently at a historical 30-year low. Where do you think interest rates will be four years from now? If you choose a variable rate, understand how high and how fast interest rates have to increase before the loan will cost you more than the fixed rate option.
4) Are there alternatives to cosigning student loans? Parents usually have a better credit rating and have access to less expensive credit. If you have equity in your home, you may be able to refinance your mortgage or get a home equity line of credit. Interest rates are usually significantly lower than student loan rates with longer terms to pay back the debt making payments more manageable. Also, for most people, the mortgage interest is tax deductible. Student loan interest deductions have more restrictive limits and phase out with income. If you have cash value in your life insurance policies, you may be able to borrow from your policies at more favorable interest rates. Most life insurance loans also let you decide if and when you want to pay the loan back.
5) Protect your assets and credit! Consider a life insurance policy on your student that will cover any medical, debt, or other outstanding expenses that will need to be paid in the event of an untimely death. I know that most people do not even want to consider the thought that their child may die before them. But bad things happen to good people every day. Parents can own the policy and make payments on behalf of the student. When the student is of age and has the means to handle the payments, ownership can be transferred to the student. Many insurance companies have programs that allow the student to increase their coverage during the term of the policy without proof of insurability. So, you are protecting their insurability in the event that health problems occur in later years.
6) And above all, accept responsibility. It is not the government’s job, the college’s job, or the tax payer’s job to pay for college or bail out students and parents who get in over their heads. Every individual should plan ahead and educate themselves about the college funding process and the tools that are available to help pay for college expenses. Know what your payments and borrowing costs will be for your student’s education before you and your student commit to any loan. Determine how much you will borrow and how much the student will borrow for the next four years.
We can help!
The Ensphere Team
The Ensphere Team
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