Co-Signing to Get Daughter Out of Debt is Risky

Dear Debt Adviser,

My daughter, unmarried and in her mid-20s, just told me that she has enormous debt and wants my husband and I to co-sign a loan to consolidate her loans. These are personal loans she took out while in graduate school (without our knowledge), in addition to her student loans. My husband and I were shocked to hear of her carelessness in placing herself in this situation. We have been extremely generous over the years, paying for her education and subsidizing houses and other expenses. Now that we are nearing retirement, we are hesitant to take on major debt that may jeopardize our future.

I would like to know what will happen to her if she defaults on her loans. She has no money saved or assets. She is employed, leases her car, and has a good credit rating but no equity. Presently, her salary will not allow her to meet her loan payments. However, she has potential for earning more in the future.

How can we best help our daughter avoid financial ruin and a difficult future? Everything I read indicates co-signing a loan is a very risky business. We also feel that having to deal with this on her own will be a good life lesson, but we are concerned about her mental well-being and her future. Is there a way we can help her without putting ourselves at financial risk? What advice do you have for us or her? Thank you. -- Barbara

Dear Barbara,

Your daughter is on the edge of a cliff. Big debts, no savings, leasing her car and no equity all add up to someone who lives for today and today only. In your letter, you have already talked yourself into the right decision and seem to be looking for corroboration from an outside, unbiased party. Well, I am happy to oblige! Yes, co-signing for your daughter would likely put your financial future in jeopardy.

My recommendation is that any help you offer should not be from co-signing but perhaps from helping her keep up with her minimum payments in return for her taking specific actions to remedy her situation. But any help has to be an amount you can easily afford each month.

Here's the deal: First, she stops charging and/or borrowing. If she is using credit cards, you get the cards to hold while you're helping out. It is nearly impossible for a person to get out of debt while continuing to use credit. She gets the cards back when you stop making payments to her.

Second, she has to match some portion of what you contribute in an emergency savings account. Without saving, she will keep having these crises. Plus, she'll need savings to take the place of credit for emergencies until she is able to make her payments on her own.

Third, she has to prepare a spending plan so she knows where her money is going each month. I recommend she discuss the spending plan with you once you all understand the situation.

Ultimately, what she does about her large debt has to be up to her. Your daughter has a good credit rating, so the most likely reason she wants you and your husband as co-signers is because the amount of the loan she would need to consolidate is large, or she expects you to make the payments.

Concerning the consequences each of you face -- for her, a default will likely mean higher interest rates, collection activity, bad credit, higher insurance rates, difficulty finding a new job or getting a promotion, hardship getting an apartment or home, and possibly court action if she doesn't keep up with payments. For you, a default on a loan you co-signed will mean the same things plus the likelihood of a rift in the family.

Should you be unable to help your daughter by sharing payments on her loans and helping her to build a savings account, don't co-sign for her. She will need to work out her own path for how she will repay what she owes. Offer her support and advice but not money. You deserve to have a secure retirement, so don't put it in jeopardy for your daughter.

Good luck!

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