Student Loans Crush Across Generations
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UPDATED: Oct 29, 2012
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Now that it has surpassed the trillion dollar mark, the student debt crisis has reached the dubious distinction of overtaking the national credit card debt. Young adults, leaving their colleges to enter the workforce, have few prospects available to them. Worse, their debt accrues interest and demands monthly payments. This very same debt cannot be discharged through bankruptcy.
Many recent student loan articles show that the plight of debt-laden young borrowers is severe. However, it has now become apparent that the situation is desperate across multiple generations, since the co-signers of many student loans are parents and grandparents. College loans, like most other types of financing, can be secured by the use of a co-signer.
Co-signers are parties that agree to be equally responsible for a debt. Their role aids many young borrowers who do not have a long history of credit compared to their established parents and grandparents. Despite their good intentions, co-signers are still responsible for payments in the event the borrower begins to default. Since the parents and grandparents of young students often serve as co-signers, it is they who suffer the burden of repaying defaulted loans.
One such young student is Kristina Pietras who borrowed a massive $132,000 in student loans before she dropped out of college. Despite her unfinished academic career, Pietras’ parents, who cosigned her debt, quickly found themselves responsible for repayment.
Even entering bankruptcy did not absolve them from this obligation since a bankruptcy judge ruled that her parents, who had recently paid for a cell phone bill and new carpet, clearly had enough money to pay for the student loans.
“The court is, thus, confronted with this dichotomy: the debtors, when incurring obligations on behalf of their daughter, find the means to pay for one obligation but not the other,” said Judge Richard Speer after denying the bid to cancel the debt, according to the Wall Street Journal.
Bankruptcy lawyers declare that a worrying number of co-signers are attempting to use bankruptcy to escape payment on bloated college debt.
According to Mark Kantrowitz, founder of Finaid.org, over 90 percent of private student loans require co-signers. In contrast to this, the federal college financing, which is guaranteed by the government, almost never requires the involvement of co-signers.
Parents and grandparents, at a later stage in life compared to their young family members, suffer from the debt they have agreed to co-sign. While filing for bankruptcy does end phone calls from lenders and collection notices, it does not exonerate co-signers from their debt. This debt can rear its ugly head when parents and grandparents try to refinance their home or apply for a mortgage.
Understandably, filing for bankruptcy as a result of co-signing student loans is a difficult emotional ordeal.
According to Guy Chism, a bankruptcy attorney, co-signers assume they were helping their young family members when they agreed to co-sign student loans.
“There’s a lot more fireworks, a lot more tears, a lot more high blood pressure and a righteous indignation that they’re being sued,” said Chism, in a Wall Street Journal interview.
Since student loans can only be discharged as a result of “undue hardship” many co-signers and borrowers find it next to impossible to relieve themselves of the debt burden.
“I was receiving no benefit from the loans, and they wanted me to pay until I was 78,” said Patrick McKenzie, a co-signer who lost his bankruptcy case.
Even in cases where the co-signers are no longer speaking, the act of co-signing still has repercussions. One woman co-signed her ex-fiancé’s student loans and was forced to pay his lenders even though she was no longer in a relationship with the man.
As expected, the courts tend to side with lenders.
Anyone thinking of co-signing a student loan should understand the massive repercussions of this decision. While co-signing for an intelligent, hardworking student is admirable, there is no guarantee that the student will receive a properly-paying job after graduation. It is idealistic to keep hope alive for student loan reform but it is far more practical to simply evaluate whether or not co-signing college financing is a wise or unwise idea.