Student Loan Traps for Parents and Grandparents Or, Why Co-Signing Student Loans May Be Hazardous
Who doesn’t want to see their children or grandchildren further their education? While this sentiment is laudable, new statistics by the federal Consumer Financial Protection Board (CFPB), set up in the Obama administration, point out the potential for catastrophic outcome.
Student loans were made virtually impossible to shed by revisions in the Bankruptcy Code in the early 2000’s. Increasingly, student loans entrap not only the young person but also the parents or grandparents.
The CFPB reports that between 2005 to 2015, the number of persons age 60 or older with student loan liabilities increased more than 400% from 700,000 to 2,800,000. During the same period, the average outstanding balance increased from $12,000 to $23,000.
Some 40 percent of the federal student loan borrowers over 65 are in default. If the loans are not paid, the lender can seize tax refunds, wage garnishment, and, in the case of federal loans, take a part of the recipient’s Social Security.
Improper loan servicing may contribute to the high default rate. Collectors may not tell the borrower of the right to “cure” the default by “rehabilitating” the loan, by making a series of on-time, income-driven payments to the collector. Once the loan is “cured”, the loan goes back to the loan servicer and may be eligible for income contingent repayment (ICR) that limits monthly payments to a fraction of disposable income and forgives the principal in the future.
Litigation is pending between the CFPB, State attorneys general against Navient, the largest student loan servicer with claims that it hid available affordable repayment options.
Certainly, parents and grandparents should seriously consider long and hard before co-signing for student loans.