Costco Connection - January 2011

■ Co-signing a loan

Fiscal prudence 101

Ask Suze Orman

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By Suze Orman
Do you have any steps to prepare our
18-year-old for taking financial responsi-
bility for himself? (We also have a 14-year-
old son.)

S. Hill Sedalia, Missouri

RAISING A CHILD to be financially responsible is not something that occurs with one lesson at the age of 18. Parents need to teach strong money values and practical money skills from a very early age. And so much of the learning is by example.

MARC ROYCE

I hope that your children have watched you live your life with financial honesty. Examples might be that you do not have credit card debt, that you have set aside money in an emergency fund, that you are saving today so you will be able to retire comfortably. If you are living below your means but within your needs, you are setting a strong example. If the pleasure of saving is equal to the pleasure of spending, you are instilling the right money values.

As a practical matter, the biggest mistake young adults make is not understanding how credit cards work. Please take the time to sit down with your kids and go through your credit card statement. Focus on information that is now included in every statement: the total cost and time it will take to pay off the debt if you were to make just the minimum payment due. That is an opening to discuss the dangers of credit card debt.

If your credit score is at least 700 I would add your child to your card; he will begin to build his own credit history piggybacking on yours, and you can help him develop good charging habits. A new law prevents those under the age of 21 from getting their own credit card unless they have proven income or an adult co-signs. Do not be a co-signer. Keep your son on your card, or let him wait until he has the income to get his own card.

The other big lesson is to teach your children the value of saving money. I think parents can make this a fun learning experience by agreeing to offer a matching contribution for any money that goes into a savings account—allowance, money from a part-time job or monetary gifts. A 25-cent match for every dollar saved can be a great incentive.

And I would introduce the “vesting” principle
used by employers that offer a matching contribu-
tion on 401(k)s: Agree that your match vests one-
third every year. So if your children make a
withdrawal after one year they are entitled to only
one-third of your match; after two years they are
entitled to two-thirds, and if they leave their
money in the account for three years they have
100 percent control of your matching contribution.

I am 72 and co-signed a loan for my grandson for college. Sadly, he passed away last September. I have been told that I am still liable for the loan because it was not government funded, but private. Is there anything I can do?

S. Baratta Phoenix, Arizona

I AM SO SORRY for your loss; no grandparent should have to go through that experience. I wish I had better news for you, but you have found out one of the worst aspects of private college loans. When the borrower dies, the lender can still demand payment from any co-signer. That is why I recommend families use only federal college loans such as Staffords (for students) and PLUS loans (for parents of students). All federal loans are discharged if the borrower passes away.

While banks have the right to demand payment, they also can choose to forgive that payment. I recommend that you respectfully explain the situation and ask them to forgive the debt. If they decide to be heartless, see if they would at least agree to a reduced payment on the grounds of basic human decency.

I realize this may not help you financially, but I want you to know you are not alone. The government is well aware of the many problems with private student loans, including the fact that co-signers are responsible for the debt of a deceased borrower.

This past fall the House of Representatives passed a bill that would require private lenders to disclose this horrible policy at the time anyone co-signs a loan. (You can learn more about this by doing a Web search for “Christopher Bryski Student Loan Protection Act.”) The bill wouldn’t ban the practice, but the hope is that borrowers (and their co-signers) would think twice about taking out the private loan. As I write this, in late 2010, the bill has yet to proceed anywhere in the Senate.

I recommend that anyone who has co-signed a private student loan should take out a 20-year term life insurance policy on the student, for the amount of the loan. It should cost only $10 to $15 a month to ensure you will be fully protected if the student were to pass away. C