Right? Who doesn’t? Well, Debbie Downer is back with some stories of parents who helped their kids get a start in the world by co-signing student loans, mortgages or otherwise becoming financially obligated for their kids’ debts. Picture this: your daughter has the wedding of her dreams and after a year of wedded bliss in an apartment, they decide it’s time to become first-time home buyers. How exciting! Soon you’ll have grand-kids playing in the big back yard just waiting for grandpa and grandma to visit!
House hunting, the kids fall short of the lending requirements for that dream house and it looks like the dream of home ownership is about to go up in flames.
But wait! The lender asks if anyone can co-sign for the kids and you are only too happy to help. Several years go by, and right on target arrive grandchild #1, the #2. Life is good and you and your wife are looking at another 10 years until retirement. You decide to downsize. There’s not a lot of equity in your home, but getting rid of the debt and into a smaller, less expensive property is a high priority, so you do some home shopping of your own.
This is where Debbie Downer enters the picture. Your lender runs your credit and sees your obligation on your daughter’s home as well. This new debt/income ratio leaves you unable to even downsize. WHAT! HOW CAN THAT BE?
So you ask your daughter and son-in-law to refinance and take you off the mortgage. Well, guess what (don’t forget about Debbie’s role in this story please) – during that conversation the kids break the news that divorce is filed and your son-in-law recently quit paying the mortgage. It’s not hit your credit report yet, but it won’t be long now.
What to do?
If you could do it again follow the famously coined advice of Nancy Regan and “just say no.” It’s not tough love – it’s reality. If the kids do not qualify for the mortgage in the first place, that means they cannot afford it. Go smaller, less expensive or remain a tenant until circumstances change.
How about those student loans? If you sign on the dotted line, the interest rate is better and as we all know, the kids will have to pay back any student loan obligation because there is no way out of it. Right? So with your signature (encouragement, love, blood, sweat and tears) your kid gets through 4 years of undergraduate, and 4 years of graduate school leaving with an advanced degree and the prospect of a long and lucrative career. He also graduates owing Uncle Sam about $200,000 dollars, but that six figure salary easily offsets the monthly obligation.
Wait a minute…Debbie is back and WHAM…right after graduation your son is tragically killed. As if losing your son is not enough, what do you think happens to those loans?
You guessed it – Uncle Sam will be knocking on your door looking for that $200,000. Now there are ways to mitigate Debbie’s horrible scenario, such as getting a term life insurance policy in an amount to cover the loan in the event the unthinkable happens. But remember, that life insurance policy, although a great idea to cover the most tragic of circumstances, does not help if your kid can’t find a job, or runs into financial trouble down the road.
What can we at Bergmann & Good do to guide you through these daily financial decisions? Lending and credit obligations are our specialty. Give us a call before you sign. If you own a business, there may be even more creative ways to offer your kids the best, while protecting your nest egg for retirement. Call us first and hopefully you’ll never have to meet Debbie Downer.