• Posts Tagged ‘college’

    Breaking the Financial Rules – Co-signing Loans

    by  • March 7, 2012 • Tagged: , , ,  • Comments

    Break rule

    I have no idea.

    image: Eason41

    Don’t spend more than you earn. Don’t buy too much house. Don’t forget to pay your bills on time. There’s quite a few financial rules that are floating around that we’re told to follow, or else. Just like rules in your everyday life, sometimes you need to know when breaking them will benefit you more than following them. One of the “rules” I often see is to never co-sign a loan. However, I’ve twice been a part of the breaking of this rule.

    Co-sign Me Out of Debt

    When I was in graduate school I had a plan: consolidate all of my debts so that I can get a better overall rate and more manageable monthly payments. That plan didn’t work out so well as some parts of the plan involved getting a payday loan and locking my keys in my car and myself out. Eventually I figured everything out and applied for a personal loan from the credit union associated with my university. Although I had been keeping up with the payments for my various debts, the loan officer was reluctant to give me the loan because of past missed payments. She told me that I could get a loan if I could get someone to co-sign the loan.

    After careful consideration, I decided that my brother would be the perfect sucker co-signer for my loan. He is seven years older, he had a great job, a house, and high income. I called him and asked for him to co-sign my loan, with the promise that since the payments would be deducted directly from my paycheck (which was true), so as long as I was a graduate student getting a stipend I would never miss a payment. After a heavy sigh and what seemed like a 20-minute pause before giving me an answer, he agreed.

    The loan was eventually paid off in full without any missed payments before I completed graduate school. A few years later, I told him over drinks, “See? You had nothing to worry about.” He made me buy the next round.

    Co-sign Her Out of Debt

    A few years after my first co-signing incident, Her and I were living together and had just combined our finances. Of course, I did this with great reluctance as I was also agreeing to help pay of Her’s enormous student loan debt of ~$130,000, of which was half federal student loans and the other half private student loans. The private student loans were the most egregious, with the interest rates at just under 10% with a monthly payment of around $750. Although we used a bunch of methods to decrease our balance and pay off the loans ten years sooner, it was still an enormous burden. Her received in the mail a letter from the private loan company stating that the interest rate could be lowered if she were to get a co-signer. Of course I was hesitant to agree to this, but I figured that it’s our student loan debt now, and that anything we can do to mitigate its financial effects would be good. I agreed to co-sign the loan.

    Me co-signing the loan did decrease the interest rate by a percentage point or so, but didn’t change the way we attacked the loan. Our saving grace came when we transferred $11,000 of the balance to a card at 1.99% for life and when Her’s godmother paid off the rest of the balance of $50,000. We laid those loans to rest, which freed me from my co-signer responsibilities.

    Have you broken any financial “rules?” What were the circumstances for that decision? Let us know in the comments!

    College: Who Pays? Who Cares?

    by  • August 16, 2006 • Tagged:   • Comments

    In deciding who should pay for college, there are two opinions: Either you believe the child should pay for school, or you believe the parents should. Most of the personal finance discussions I’ve seen on the topic have degenerated into a slothy pit of self-righteousness and generalization. Rather, I propose a truce: whichever you believe, HAVE A PLAN!

    The choice of who pays has an economic effect on the entire family. I believe the best option is to create a plan that supports each individual’s goals while respecting the needs of the family. It’s important to develop the college payment plan early – really early. Decide what is financially possible and create a plan that is respectful of everyone’s needs.

    If you believe your children should shoulder the cost:
    • Communicate your expectations early. Don’t spring this on your child a year before college.
    • With your child, research the best vehicle for your child’s savings. Teach your child about compound interest and help them understand how much money they will likely need to accrue.
    • Be persistent in reminding your child to save. Make it a rule that a certain percentage of gifts, allowances, and income must go into the college account. Set up direct deposits if possible.
    • Tell relatives about your family’s plan and encourage them to be supportive. Relatives may be willing to give gifts of savings bonds etc.
    • Reward you child for their hard work. Maybe you can match a portion of their savings or reward good grades with a contribution to their account.
    • Help your child formulate a complete plan. It’s unlikely that their savings alone will fully cover the cost of college. Help them put together a plan that includes savings, scholarships, income from a part-time job, and loans.
    • If possible, consider loaning them the money yourself to help them save on interest.
    • Consider purchasing their housing yourself. Maybe their student condo can become your retirement or vacation home, or be flipped at a profit. Some children assume mortgage payments and ownership after graduation.

    If you believe parents should foot the bill:
    • Be sure your plan truly reflects your financial abilities, rather than just what you wish you could do. It’s unfair to promise the money only to come up short when the bill is due.
    • Make retirement savings your priority.
    • Communicate your expectations early.
    • To teach kids responsibility, make them responsible for some of their expenses, such as a car.
    • Research the best investment vehicle for your savings. Choose one that can be switched to retirement savings with no penalty, just in case your child ends up not needing the money.
    • Consider attaching the money to reasonable expectations. Maybe you agree to pay 100% if they maintain a 3.0 GPA, but only 50% if they drop to a 2.5 GPA. Make these expectations clear and stick to them.

    Every family needs to start early, create a respectful and achievable plan, communicate the plan to everyone, and then work together to achieve it. In the end, it doesn’t matter who paid for what. What matters is that each person is respected and supported.