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The Dangers of Debt: Co-Signing a Student Loan

Many parents increase debt when co-signing student loans for their children's education. They should keep 2 points in mind:

Usually, although both parents may agree on supporting a child's college expenses, only one parent actually co-signs for student loans and thus one parent is legally obligated to pay the loan.  Some parents do not dicuss student loans for the 2nd through 4th years with each other, believing that the initial agreement to take on the cost of college education just continues, when in fact one parent may be opposed to it but allows the other to sign for the loan anyway.  

If the parties divorce in Rhode Island, the non-signing parent may seek to avoid any liability on the obligation asserting that it was not for a minor child (college students are usually over 18) and therefore not a "necessary expense". The non signing parent may testify that she/he was opposed to it and that the issue of whether the non-signing parent must contribute to the financial obligation is left up to a Court. A best practice is to have either both parents sign the form, or have both parents sign a separate agreement that each will be responsible for repayment of the student loan. If you are getting a divorce and this is an issue, contact Steven Hirsch to work with you to negotiate a fair resolution of this debt.

A recent case noted in the Baltimore Sun highlighted a case where a Temple University student died. Both his student loan and the $55,400 loan the mother took out in ParentPLus debt were forgiven. However, that was not the end of the story. The IRS expects the mother to pay a $14,000 tax bill because the forgiveness of debt is considered income to the mother. Whenever a debt is forgiven, the "forgiven" amount of the obligation is considered taxable income to the borrower. The mother does not have the money to pay the tax. Penalties for underpaid tax will accrue in the meantime. She may enter into a payment plan or seek a compromise amount. A best practice is to have a term life insurance policy on the child in the amount of the parents' financial obligation.

Even if the plan is for the child to pay the loan after he/she completes college, the parent who co-signed the loan will have it on his credit report for years to come. 

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