Michelle’s Mailbag: Co-signing on student loans

By , Monday, April 22, 1:49 PM

This week I’m starting a new feature. I’ll be answering the questions I couldn’t get to during my weekly live chat. I’ll also be pulling from questions you send to me thorough e-mail (colorofmoney@washpost.com), Twitter (@SingletaryM) or Facebook (www.facebook.com/MichelleSingletary.com).

Kids’ “life happens” funds gone

I wrote in last week wondering if I should use my kids’ “life happens” savings accounts (for proms, summer camps and braces) to put a big dent in my $11,000 credit card debt that snuck up on me. It took me less than five minutes after your advice to empty the accounts and pay $7,000 on the debt. While I was sick to my stomach for about five minutes I then felt this huge relief because I was no longer facing a mountain, rather a small hill that I can tackle with some determination. I have come up with even more creative ways in the past week to pay off the rest in a hurry. Thank you, thank you, thank you. You are a gem!

I’ll take the compliment but I’ll also give one. It takes a lot of courage to let go of money to dig out of debt. Good for you!

Student

I’m trying to help my daughter consolidate some student loans, but having difficulty because of her credit rating. Can we consolidate in my name only and then transfer the loan in her name with me as a co-signer after her credit rating comes up?

Consolidation loans pull together all the loans into one payment. The greatest benefit to consolidation is having one loan to deal with rather than multiple loans. The one loan can then be stretched out longer, making monthly payments lower. But the longer the loan, the more interest your daughter will pay.

There’s also typically a small interest rate break if the borrower pays the loan on time for a certain amount of time. Consider this from www.finaid.org , a great Web site with a treasure of information about student loan borrowing: “Don’t be fooled if someone tries to suggest that this will save you money by getting you a lower interest rate. The interest rate may be lower than the highest of your interest rates, but it is also higher than the lowest of your interest rates. More importantly, the amount of interest you pay over the lifetime of the loan will be about the same.”

So, with that in mind, I would not recommend taking on the responsibility of the loans. Doesn’t matter if you could get one loan to pay off your daughter’s loans. Once you assume responsibility for the debt, it’s yours. What if she still can’t qualify later or pay on the loans? Then you are completely stuck with her debt.

One of my primary money rules is never to co-sign for anyone — yes, even your child. Here’s a horror story on Consumerist.com of what can happen when you co-sign for student loans.

I would just help her come up with a plan to aggressively pay off the student loans . If her loans are federal loans, there are a number of payment options that can help if she can’t afford the payments.  Here are two sites I want you to visit to explore your daughter’s options:

• www.finaid.org/loans/consolidation.phtml

• www.studentaid.ed.gov/repay-loans/consolidation

http://www.washingtonpost.com/business/michelles-mailbag/2013/04/22/396b2844-a84e-11e2-a8e2-5b98cb59187f_story.html

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