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One question is bound to pop up as college students head to campus: "Hey, Mom, would you cosign for a student loan?"

And too often that knee-jerk reaction is "Sure, why not?" Parents and grandparents feel they should help out when it comes to getting a college diploma and contribute to building up all that college debt.

"There's no boxed warning label that says cosigning a student loan may be hazardous to your wealth," said Mark Kantrowitz, a college debt expert and senior vice president and publisher for Edvisors.com.

OK, but maybe there should be.

"On this loan, you're giving them the keys to your car," Kantrowitz said. "You're giving them the ability to ruin your credit."

For the student, getting a cosigner increases the chance of being approved for a private student loan. The borrower typically would qualify for a lower rate. Loan rates on private student loans vary based on credit history.

But cosigning is nothing as simple as offering a reference. It can mean the parent or grandparent is on the hook if the student defaults. Cosigning puts your credit score at risk if the student makes late payments or falls behind.

We all have great faith in our children, but it's possible they won't get a job right away or even complete college.

Katie Moore, financial counselor at GreenPath Debt Solutions in Detroit, said sometimes students just take on so much debt that they're truly unable to repay it. She met one aunt who took on a good deal of debt for a nephew and then was not in contact with the student. She had no idea that the student loans were not being repaid.

"She actually thought he was repaying them until she got the calls," Moore said.

The aunt now faces the burden of those student loans, along with her own financial hardship after a layoff. Another point: Student loan debt typically cannot be discharged in bankruptcy.

Kantrowitz noted that a parent who cosigns a student loan could face more hurdles down the road, if that parent later wants to refinance a mortgage or take out a loan to buy a new car or truck. That cosigned loan is treated as if it were the parent's loan.

Some points parents - and, yes, grandparents - need to consider before cosigning for a high-cost private student loan:
* Did the college student first apply for federal student loans?
Federal student loans do not require a cosigner. About 90% of private student loans were cosigned in 2011, according to the Consumer Financial Protection Bureau. That's up from 67% in 2008.

Federal Stafford Loans for undergraduate students will have a fixed rate of 4.66% if the student loan is taken out between July 1 and June 30, 2015. Federal Stafford Loans for graduate students will have a fixed rate of 6.21%.

Interest rates are fixed for the life of new federal student loans, but as students borrow more each year, they're facing new loans that could have a different fixed rate.

Kantrowitz is forecasting that next academic year the new undergraduate Federal Stafford Loan rate could be 5.5% and the graduate Federal Stafford Loan rate could be 7%.
* Did the parent look into the federal PLUS loan?
Federal Grad PLUS and Federal Parent PLUS Loans are at 7.21% for loans taken out July 1 through June 30, 2015.

One potential drawback is that a parent with a bad credit history cannot take out a Parent PLUS Loan on his or her own. Expect a credit check.

If you have a bad credit history, you might still be able to take out a PLUS loan if you get an endorser who has a better credit history. But the endorser is someone who agrees to repay the loan if you do not. The endorser could be another relative, maybe the student's aunt or grandparent. But the endorser may not be the student who needs the loan.

Step-parents can borrow for the PLUS loan only for as long as they are married to a biological or adoptive parent, unless they have adopted the student.

Under the PLUS loan, the parent is obligated to repay that loan. As a result, though, the parent does not have to worry that his or her credit will go bad if the student isn't paying the loans on time. Some parents pay the PLUS loans and work out a way where the student repays them later. PLUS loans also have more flexible forbearance options than private student loans.

Making the grade when it comes to student loans must include figuring out what the monthly payments will be in the future. Everyone gets a flunking grade if no one can afford to pay the long-term bill.
Contact Susan Tompor at stompor@freepress.com
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Cosigning a student loan risky for parents

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One question is bound to pop up as college students head to campus: "Hey, Mom, would you cosign for a student loan?" And too often that knee-jerk reaction is "Sure, why not?" Parents and grandparents feel they should help out when it comes to getting a college diploma and contribute to building up all that college debt.

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Thinking about your eventual death isn't fun. But it's something you need to plan for, especially if you're one of the 44 million Americans with student loan debt. You want to know what happens to your debt when you die.

What happens to student loans when you die?

Whether or not your student loans pass on to someone else when you die depends on the type of loans you have.

Take the time to figure out when you die what happens to your debt so you can reduce the chance that your loved ones end up bearing the brunt of your debt.

If you have federal student loans

When it comes to federal student loans, the news is pretty good. "Federal student loans are discharged when the borrower dies," said Jay Fleischman, a student loan lawyer.

If you die with federal student loan debt, you won't have to worry about it being passed on to anyone else. Once you pass on, the federal student debts in your name are discharged. To receive this discharge, your survivors need to present a certified death certificate to the loan servicer.

If you have Parent PLUS Loans

Parent PLUS borrowers are also eligible for a death discharge, since PLUS loans are federal loans.

Fleischman added that for Parent PLUS Loans, it's the parent - not the student - who is legally obligated to repay the loan. "These loans can be discharged when either the parent or the student dies," he explained. "Discharged federal student loan obligations won't pass to your estate, and your heirs won't have to pay them off."

Realize, though, that there are tax consequences associated with the death discharge of a Parent PLUS Loan due to the student's death. Parents receive a 1099-C form from the IRS after the debt is canceled. The remaining debt canceled is treated as taxable income. So parents in this situation could be hit with a large tax bill.

If you have private student loans

If you have private student loans, things get a bit trickier. Some private student loan lenders do offer a death discharge, but not all of them.

Private student loans, including refinanced loans, are more like traditional personal loans. As with other types of debt, private lenders might come for your estate when you die. However, if the loans are only in your name, your children or other relatives aren't generally considered liable, according to Credit.com.

If you have a cosigner

If your private student loan has a cosigner, which many of them do, you might be in trouble. Your cosigner is legally responsible for your debt after you pass away, regardless of the type of loan in question. And, in some cases, cosigned debt repayment can be accelerated.

"The death of the borrower or the cosigner can trigger default," explained Heather Jarvis, a student loan expert. "That means the entire balance becomes due immediately, even if the surviving signer has always made payments on time."

So what are you to do if you have cosigned student loans? Look into a cosigner release.

Typically, lenders require you to make on-time payments for a specified period of time and illustrate that you are financially capable of handling payments on your own. Once you've done this, you can obtain cosigner release. However, not all lenders offer this option.

In some cases, it makes sense for parent cosigners to purchase a life insurance policy for their child. In the event of death, parents would receive a sum of money to help cover the repayment of cosigned student loans.

If you go this route, look into a life insurance policy that covers the cost of any outstanding debt. For example, if you'd be on the hook for $50,000, then get a life insurance policy for at least that amount or more.

If you're married

If you acquired student loan debt through marriage and live in one of the nine community property states - Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, Wisconsin - your spouse could be liable for your student loans after you die.

This is usually not the case if you took out your student loans before marriage. In this case, your spouse would be on the hook only if they are also a cosigner.

How to prepare and limit the damage

The answer to what happens to student loans when you die isn't a straightforward one. It depends on the types of loans you have, the state you live in if you have a cosigner, and many other factors.

The best thing you can do to make sure you and your family are protected by understanding your lender's policy regarding death discharge and reviewing it in depth. Use the National Student Loan Data System (NSLDS) to figure out who your servicers are and contact them to find out their policies.

In addition, look into cosigner release and a life insurance policy that could help with any outstanding debt. You can also consider federal loan consolidation or student loan refinancing to simplify your payments and gather all your loans in one place.

Preparing now for what happens to your debt when you die can save your family from financial trouble down the line.

Preparing now can save your family from financial trouble down the line.

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What Happens To Student Loans When You Die? | Student Loan Hero

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Thinking about your eventual death isn't fun. But it's something you need to plan for, especially if you're one of the 44 million Americans with student loan debt. You want to know what happens to your debt when you die.