Here’s What Advisors Need to Know When Clients Co-Sign for Kids’ Student Loans

That college acceptance letter isn’t the only fine print parents should be reading closely.

Clients with kids often feel compelled to help them cover the high cost of a college education, often by co-signing their student loans. Doing so can give students a leg up by helping them secure a better interest rate or even qualify for a loan in the first place. It’s critical, however, for parents to understand what they’re signing up for, and hint hint, it’s a lot more than a hard credit check. For all but the most affluent families, sky-high college education costs are nothing to sniff at, and the repayment of tens or even hundreds of thousands of dollars in debt won’t be easy. If their kids fall behind, co-signers are “100% on the hook,” warned Jack Wallace, director of government and lender relations at Yrefy. All too often, parents end up jeopardizing their own financial wellbeing.

“The important thing for parents, and increasingly grandparents, who are co-signing these loans is to go in with eyes wide open,” Wallace told Advisor Upside. “It’s also important to have a frank conversation. What is a college education really worth? How much can the family truly afford?” 

Mountain of Debt

Wallace has 40 years of experience tracking education cost inflation, and while the question of paying for college has always been difficult, the situation today is “completely out of control.” Education Department data backs that assessment: 

• US student loan debt totals approximately $1.833 trillion, with 42.8 million borrowers holding an average federal balance of $39,547.
• Nearly three in four (71%) borrowers report delaying major life milestones like buying a home or starting a family.

These numbers should force a hard conversation, but the most important lesson isn’t that expensive schools are always a bad idea. “Families need to be informed shoppers,” Wallace said. Unfortunately, people tend to buy first and set their budget second. They also fail to consider that state and community colleges may provide just as much opportunity for learning and career advancement as historically prestigious institutions. 

“I’m not trying to be offensive, but if you graduate with $400,000 in debt and an anthropology degree, you’re in a tough spot,” Wallace said. “If would-be co-signers are worried about how the debt gets paid back, they could go a different route and contribute to a 529 account or make a gift.”

Don’t Forget the FAFSA! The other big mistake Wallace sees is when affluent families forgo filling out the Free Application for Federal Student Aid, known as the FAFSA. People often assume they are too wealthy to get any aid. That may be true for federal aid, but the FAFSA is also used as a basis for the distribution for state and institutional aid. “The last time I checked, it was something like 85% of people that fill out the FAFSA get some sort of financial aid,” Wallace noted.