Why You Shouldn’t Co-Sign Your Grandkid’s Student Loan

College financial aid offers have been sent out, and the traditional May 1 deadline for high school seniors to pick their schools is fast approaching. That means all across this great land of ours, grandparents are getting hit up by would-be college students desperate to use their elders’ good credit.

Federal student loans don’t require co-signers, but private student loans typically do. If the student’s parents don’t have good credit scores or aren’t willing to co-sign, a loving grandparent may be asked to step in.

» MORE: Should you co-sign a student loan?

Most of the time, the grandparents should say no. Here’s why:

• The loan will show up on a grandparent’s credit report and can have an impact on their ability to borrow money

• Late payments can trash the grandparent’s credit scores and subject them to collection calls, lawsuits and potential wage garnishments or liens on bank accounts

• If the grandparents take over the payments to preserve their good credit, the strain on their finances can endanger their retirement

• Older people with student loans are more likely than those without such debt to say they’ve skipped prescription medicines, doctors’ visits and dental care because they could not afford them, according to the Consumer Financial Protection Bureau

Older Americans increasingly are saddled with debt they took on to educate the younger generation. The number of people 60 and older with student loans quadrupled from 700,000 in 2005 to 2.8 million in 2015, according to the CFPB. The average amounts they owe increased from $12,100 to $23,500 in the same period.

Although some borrowed for their own or a spouse’s education, in 2014 nearly 3 out of 4 reported borrowing for their descendents, according to the CFPB. Sixty-eight percent said they owed the money for a child’s or a grandchild’s education, while an additional 5% owed money for their own or a spouse’s education besides borrowing for kids or grandkids.

Many grandparents agree to co-sign a loan because they want to help their grandchildren and may not have the resources to help them pay for college, says Lori Trawinski, a certified financial planner and director of banking and finance for AARP Public Policy Institute. They often don’t understand they’re also legally responsible for the loan.

“People are surprised when you tell them that,” Trawinski says. “They didn’t realize they were on the hook.”

Even people who understand the risks of co-signing often take a bigger gamble than they realize. Many students who start college drop out. Without degrees, people tend to earn less and have higher unemployment rates, which can make it difficult to repay student debt. That’s why private lenders typically insist on co-signers for student loans.

Saying “no” means the grandkids can still go to college, but they’ll have to look for a less expensive education or use federal student loans, which don’t require co-signers.

If these warnings are too late, and a grandparent has already co-signed a loan, here are ways to contain potential damage:

• Monitor your credit. Co-signers may not be notified if a payment is late. In fact, they may not be notified until the loan is in default and collections have begun. A dip in your credit scores may be your first indication there’s a problem.

• Take over payments. If you can afford to do so, make the payments, then ask the student to reimburse you. That way you can ensure payments are made on time.

• Ask to be released. Typically co-signers can be dropped from the loan after a certain number of on-time payments, Trawinski says. The student loan contract should have details about this or you can call the loan servicer.

If the loan goes to collections:

• Explore settlement. You may be able to settle private student loan debt for less than the face amount if it’s clear you can’t pay. Be aware that settlement can do further damage to your credit scores.

• Talk to a bankruptcy attorney. Student loans are extremely difficult to erase in bankruptcy court, but an attorney familiar with your state’s credit laws can advise you if you’re sued. If you don’t have any assets other than retirement funds, and your only income is from Social Security and pensions, you may be “judgment proof.” That means even if you’re sued, the creditor can’t collect anything.

That’s a grim scenario, but you’re better off than people who take out federal student loans. Those typically can’t be settled and the government has extraordinary collection powers, including garnishing Social Security checks. At last count, nearly 114,000 older Americans had to give up a portion of their Social Security to pay overdue federal student loans.