Cosigning your kids' or grandkids' student loans? Think twice

Though the biggest debt for older consumers remains home mortgages, student-loan debt is becoming more common.

It's increasing because of the high cost of college and the growing number of parents and grandparents financing their children's and grandchildren's education, according to a January Consumer Financial Protection Bureau report.

From 2005 to 2015, the CFPB report said, the number of Americans age 60 or older with one or more student loans quadrupled to 2.8 million from 700,000 — making them the fastest-growing segment of the market.

Average debt roughly doubled from $12,000 to $23,500 over that period, the report said. About three in four older borrowers with student loans used them to finance their children's or grandchildren's college costs, as opposed to, say, their own or a spouse's education. They owed a total of $66.7 billion in 2015, the most recent year for which data are available.

Before signing or cosigning a student loan, think long and hard.

"Often times, it's better to just have your kid sign the loans themselves and help them pay for it on the back end" after they graduate, said Kevin Norris, president of Univest Wealth Management in Souderton. That's what he did with his own son.

What happens if you're a senior who defaults on a student loan? With federal loans, the government can garnish your Social Security benefits. You can try to ask for a deferment or payment plan — assuming your loan servicer will help you.

A loan cosigner or co-borrower is held responsible for repaying the loan along with the primary borrower. Student borrowers often turn to their parents and grandparents to cosign their private student loans.

The U.S. Government Accountability Office found in 2015 that nearly 870,000 borrowers age 65 and older owed money on federal student loans. More than half of cosigners on private loans are age 55 and older.

Unlike federal student loans, private student-loan lenders routinely require that a student apply for a loan with a cosigner or co-borrower.

The CFPB estimates that 27 percent of individuals who are cosigners on one or more outstanding student loans are 62 and older, and 57 percent of all individuals who are cosigners are 55 and older.

Nearly 40 percent of federal student-loan borrowers age 65 and older are in default, and those who carry such debt later into their lives often struggle to repay.

A growing number of older federal student-loan borrowers have even had their Social Security benefits offset because of unpaid debt from those loans, the CFPB found. In addition to garnishing benefits, a portion of tax refunds can be offset for nonpayment.

By contrast, private student-loan lenders cannot offset Social Security disbursements to collect the debt.

Often, loan servicers are at fault, consumer advocates say: Older borrowers complained to the CFPB that account errors led to offsets of Social Security benefits, even though many of the borrowers would otherwise be eligible for payments based on their income.

When a borrower defaults on a federal student loan, he or she has the right to "cure" the default by "rehabilitating" the loan — a process through which the consumer makes a series of on-time, income-driven payments to a debt collector. Once cured, the loan is out of default status, and the borrower is transferred out of collections and back to a student-loan servicer, thus regaining eligibility to enroll in an income-based repayment plan.

But if a borrower who has defaulted can't make payment arrangements with the collector, he or she may become subject to wage garnishment or federal benefit offsets.

"When student-loan borrowers make a mistake, companies hold them accountable with immediate penalties and negative credit reporting. But too often, it seems that those same companies have immunity when they break the law," said Rohit Chopra, senior fellow at the Consumer Federation of America and the former assistant director and student-loan ombudsman at the CFPB.

The bureau and state attorneys general recently filed suit against Navient, the country's largest debt servicer, claiming that it incentivized employees to push student-loan borrowers into forbearance plans instead of helping them sign up for affordable repayment options. Navient has said the allegations are false and has said that "we will vigorously defend against these false allegations and continue to help our customers achieve financial success."

"If true, this means that the company's actions may be leading to excessive interest charges and unnecessary defaults," Chopra said.

"For too long, the nation's largest student-loan company has been running roughshod over student-loan borrowers," he said. "While it's sat at the top of the list when it comes to consumer complaints, it's been at the bottom of the list when it comes to customer service."

You can contact the CFPB online at consumerfinance.gov/complaint, by calling 1-855-411-2372 (TTY/TDD: 1-855-729-2372), or by sending a letter to Consumer Financial Protection Bureau, Box 4503, Iowa City, Iowa 52244.

Contact the CFPB's student-loan ombudsman by email students@cfpb.gov or  by mail at Consumer Financial Protection Bureau, 1700 G St. NW, Washington, D.C. 20552.