- Should You Co-sign on a Student Loan for a Child or Grandchild? | Michigan Estate Planning & Elder Law
- Risks of Co-signing on a Student Loan
- Is Co-signing on a Student Loan Worth It?
- Being a Wise Co-signer
- What Happens to Taxes When You Co-Sign a Mortgage for Your Child?
- What Happens When You Co-Sign a Mortgage For Your Child?
- Taxes to Consider When Your Child Sells the Home
- Other Considerations Before Co-Signing the Mortgage
- More on Mortgage and Financing
Should You Co-sign on a Student Loan for a Child or Grandchild? | Michigan Estate Planning & Elder Law
College is increasingly expensive, and long gone are the days when students could pay their college expenses with the earnings from a summer job. More and more students are relying on loans to pay for college, and many of those are private student loans, which are not funded or subsidized by the federal government.
Parents and grandparents who want to help a student get through college may consider co-signing on a private student loan. This can be a real benefit to a young person who doesn't have a long credit history, or a strong one.
Because the co-signer's credit history is taken into account on the loan application, having a co-signer with a solid credit history can bolster a student's chance of getting a loan, or getting one with more favorable terms.
It might seem a no-brainer. Your child or grandchild needs help, your signature can get them that help. Why would you withhold that assistance? You don't need to, but you should make the decision to co-sign on a student loan with your eyes wide open. Let's look at some of the risks you should consider.
Risks of Co-signing on a Student Loan
The bottom line is that co-signing for a loan of any type puts makes you responsible for repaying the loan if the primary borrower can't keep up with payments. No matter how unly you imagine that scenario to be, you need to be completely comfortable with the idea that you are on the hook legally, and that it is a very difficult hook to remove yourself from.
It can be a painful hook, as well. Let's say your student takes out $75,000 in private loans, which is not an outrageous amount—many students graduate with double that much debt.
If the interest rate is 5% (and it could well be more) and the repayment period is ten years, the monthly payment will be $795.49.
If you are on a fixed income, or don't have an extra $800 per month lying around, you may not want to risk co-signing for that loan.
What's more, if your student defaults on their loan, and you can't make the payments, then your inability to pay could destroy YOUR credit and expose you to the tactics of aggressive debt collectors. Not the way you want to spend your golden years, if you are already retired, and certainly not how you want to prepare for retirement if that is on the horizon.
With all that could go wrong if you co-sign on a student loan for your child or grandchild, the next step is to consider whether the boost your signature would give their application is worth the risk that it would involve.
Is Co-signing on a Student Loan Worth It?
Given the risks described above, you might not want to consider co-signing a loan for your grandchild or child unless the benefit of doing so is great. You might assume that as an older person with more income and a stronger financial background, your signature as co-signer would be invaluable. But will it?
The primary reasons for co-signing are to boost the lihood that the loan application will be approved and to secure the lowest possible interest rate or other favorable terms. However, an older co-signer, especially a grandparent who is retired, may not be able to help a student achieve these goals.
The primary reason for having someone co-sign a loan is to boost the lihood that the loan application will be approved. The other reason is to try to secure the lowest possible interest rate or other favorable terms on the loan.
However, an older co-signer, especially a grandparent who is retired, may not be able to help a student achieve these goals.
If you are living on a fixed income or are no longer working, you may not be able to make the loan payments in the event the primary borrower defaults.
If that is the case, your signature on the application as a co-signer may not increase the chances of acceptance or favorable terms very much at all.
wise, just because you're older doesn't mean your credit history is in great shape. If it's not, co-signing on a student loan probably won't help your student, and may even hurt them.
Being a Wise Co-signer
After all this analysis, you may still decide that you want to co-sign on your student's loan. If you do, you should take every possible measure to protect yourself. The first and most obvious step is to read everything you plan to sign, including (especially) the fine print.
Don't assume you know what constitutes a default. In fact, the definition of that important term may vary among lenders. wise, consider, if the primary borrower does default, what actions the lender might be able to take against you. Envision scenarios that might occur.
What if the primary borrower dies, becomes disabled, or needs to file bankruptcy? What if you do? Be aware that most student loans are not dischargeable in bankruptcy. Another factor many people fail to consider is whether there are any penalties for prepayment of the loan.
Look specifically for this information and ask about it if anything is unclear.
Last, but most certainly not least, do not feel pressured into co-signing for a loan if you are not completely comfortable doing so.
Putting yourself at risk of debt to try to help a loved one have a promising future makes no sense, and in fact sets a bad financial example.
Consult your attorney or financial planner to discuss ways that you can help a child or grandchild without jeopardizing your own future.
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What Happens to Taxes When You Co-Sign a Mortgage for Your Child?
What happens to your taxes when you co-sign a mortgage for your child? It all depends on how you decide to hold title on the home.
Q: If I co-sign a mortgage so my son can buy a house, how will that affect my taxes for the profit when it is sold? He will make all the payments including the closing costs when the house is bought.
What Happens When You Co-Sign a Mortgage For Your Child?
A: You can’t imagine how often we’ve received this question in the past ten years, since the housing crisis.
As Millennials are graduating with steep student loan payments and credit card debt, it’s been increasingly difficult for them to afford housing.
So, parents and other relatives have stepped in to assist their children and grandchildren with down payments or, in many cases, cosigning loan documents in order for the kids to qualify for the mortgage.
When parents assist their kids by cosigning loans, the parents may think of themselves as guarantors but if the lender requires the parents to be co-owners and co-signers on the loan, they actually will be borrowers and owners with their kids.
When a lender has the parents sign a document agreeing to guarantee the loan and does not require them to hold title to the home, they are guarantors.
We usually see the situation where the lender requires the parents to both own title to the home with their kids and also sign all of the loan documents.
While the child lives in the home, the child usually takes all of the federal income tax benefits associated with any deductions on the interest paid on the loan and any deductions associated with the payment of real estate taxes. wise, when the child sells the home, the sale is reported on the child’s social security number and not the parent’s.
Taxes to Consider When Your Child Sells the Home
Down the line when your son sells the home, your son should be entitled to exclude from federal income taxes up to $250,000 in profit from the sale of the home.
If your son is married, a married couple can exclude up to $500,000 in profits from the sale of the home. There are certain limitations and qualifications as usual.
The biggest requirement is that the home must be owned and occupied as a primary residence for at least 2 the last 5 years by the married couple.
Even if you are a co-owner of the home, as long as your son treats the home as his alone, pays all the expenses on the mortgages, pays any real estate taxes and takes care of the home, you shouldn’t be considered an owner or responsible for any profits on the sale of the home. Your role should be considered as a mere guarantor on the loan. And, your kid should be (very) thankful for your help.
However, cosigning the mortgage means that should your child stop making payments, the lender will look to you to pay the entire mortgage amount, plus any catch-up amount that is owed, if your child has stopped making loan payments.
Legally, you are responsible for 100 percent of the mortgage, and if the child stops making payments for property taxes and you don’t pick up that up, you could lose the property for nonpayment of taxes.
So, make sure you are confident your child can easily make the mortgage and property tax payments before he closes.
Other Considerations Before Co-Signing the Mortgage
One last consideration: how you and your son will own the home.
While you and your son could own the home as joint tenants with rights of survivorship, you should have a conversation with your son as to what each of you would want in case either of you should die while you own the home.
Generally, the parent wants any interest the parent has in the home to go to the child, but it isn’t always the case that the parent wants to own the home if something should happen to the child.
It’s worth a discussion and if both of you agree that the other should be the sole owner of the home should either die, then the choice should be to own it as joint tenants with rights of survivorship.
On the other hand, if you and your son wants to make sure that he, his wife or children inherit the property on his death, you might want to consider a different arrangement.
You can use living trusts, own the home as tenants in common or various other alternatives to make sure that upon your son’s death, his share of the home doesn’t come back to you.
You’d want to talk to an estate planning attorney or real estate attorney to go over your options.
And remember, when a lender requires you to co-sign on the loan, they will require you to be an owner as well. Good luck.
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