It seems like such a harmless endorsement: Co-signing a student loan for dear, sweet Madison, the apple of your grandmotherly eye. Of course, you want her to go to college; of course, you're willing to vouch for her! Too bad you won't have much spare cash to help her out, now that you're close to retiring. But it doesn't take any money out of your pocket to co-sign a loan, so why not give this lovely child the benefit of your excellent credit rating? 

Here's Why: You Could Get Stuck Repaying That Loan 

And you wouldn't be alone: A January 2017 report from the Consumer Financial Protection Bureau (CFPB) notes that the number of consumers 60 and older with student loan debt in the U.S. has quadrupled in the last 10 years, reaching an estimated $66.7 billion in loans. In 2015 there were 2.8 million older Americans with loans; in 2005 that number was just 700,000. The average debt was $23,500, up from $12,100, and researchers think this understates the problem because it doesn't include home equity loans, credit cards or other funding sources.

That's a surprisingly large non-mortgage debt for people about to retire, especially since in 2001, just 16 years ago, households headed by this 60+ age group owed so little on student loans that their share rounded down to 0%. 

Yes, some few retirees may have borrowed to go back to school themselves – to satisfy a life-long desire for a PhD in art history, perhaps. But mostly they have borrowed or co-signed to send laid-off members of their families back to grad school during the Great Recession or co-signed for the undergraduate generation. CFPB analysis of 2014 data shows that 73% of the student loans were used to finance a child's and/or grandchild's education.

One reason for so many co-signers, according to the CFPB, is that private student loan lenders, unlike federal lenders, routinely require a co-signer – the researchers estimate that 27% of these co-signers are 62 and older (57% are 55+).

Sometimes these good deeds can come back to bite them. And bite them hard: In 2015, 37% of federal student loan borrowers aged 65 or more were in default. In 2015, 40,000 borrowers aged 65+ had their Social Security benefits  garnished to pay back federal student loans. Since only the federal government can garnish Social Security benefits for this purpose, this figure does not include all of those who are behind on private student loan payments. 

Losing 15% of your Social Security check – the most the feds can seize – is no fun. The collection process on private loans can be even less pleasant, as the CFPB report details: Harassing telephone calls, poor servicing and improperly charged fees are only three of the issues reported.

Learn the Legalities of Co-signing

First, consider the fact that if someone needs a co-signer, it’s because they do not qualify for credit on their own. You are taking a risk that the professional lender is not willing to take.

– By co-signing, you accept the legal obligation to repay the loan on the terms outlined in the credit agreement. If the primary borrower doesn’t pay for whatever reason, you will have to.

– The amount may snowball. You may have to pay late fees or collection costs. A loan that has been deferred may have accumulated additional interest on the principal.

– A loan made to a student is based on future earning power – intellectual assets, if you will, rather than real property like a house. But when you co-sign, you are putting your real assets on the line.    

Face Up to the Risks of Student Borrowing

Although the job market for the class of 2016 was considered to be better than in recent years, it's still tighter than before the 2008 recession and wages are not high. According to a study of the Class of 2016 from the Economic Policy Institute, nearly 13% of young college grads are "currently underemployed," compared to 9.6%  in 2007. Grads without internship experience or the most in-demand college majors may find themselves working minimum-wage jobs with fewer than fulltime hours. They may not be able to keep up with loan payments. One study of the Class of 2005 found that five years later, only 40% of borrowers had made payments as outlined in their credit agreements.

– Even if your beloved Madison is able to repay on schedule, her debt is added to your total financial exposure on credit reports. On a reduced retirement income, that may give you an unfavorable debt-to-income ratio – a problem if you need to buy a car or major appliances, refinance an existing loan or mortgage, or raise cash for some other need.

– The margin for error is slim-to-none. “Missing just one student loan payment puts a borrower in delinquent status,” the National Association of Consumer Bankruptcy Attorneys (NACBA) reports. “After nine months of delinquency, a borrower is in default.” Goodbye to that excellent credit rating.

Michigan’s Attorney General Bill Schuette points out, “The creditor can collect this debt from you without first trying to collect from the borrower. The creditor can use the same collection methods against you that can be used against the borrower, such as suing you, garnishing your wages, etc.”

Student loans are virtually inescapable; not even bankruptcy wipes them out. The NACBA warns: “While any default hurts a borrower’s credit, the consequence of a default on a student loan is particularly onerous. Once a default occurs, the full amount of the loan is due immediately. The government also cuts off any future federal financial aid and strips the borrower’s eligibility for loan forgiveness.”

How You Can Try To Protect Yourself

There are a few safeguards you may be able to build in if you feel you must sign for someone very near and very dear. One is a written guarantee that the lender will make every effort to get repayment first from the primary borrower before coming after you. 

Another safeguard is to establish your right to withdraw after the loan has been properly paid by the primary borrower for the period specified in the loan agreement. A common term is 36 up-to-date payments; Sallie Mae’s Smart Option Plan requires only 12, which is unusually short.

Don’t count on being able to get a release, though, since one of the top complaints of borrowers is the difficulty of fighting through multiple barriers raised by lenders.

As the credit reporting bureau Equifax’s Chief Economist Amy Crew Cutts points out, “Student loans is one area of lending not affected by the tighter underwriting standards since the start of the recession.”

Also, be aware that state laws that govern credit agreements may not support your efforts to get these provisions written into private loans. (In the state where the contract is executed, check the attorney general’s website for information.)

– Monitor the loan constantly so you know if it's close to default and you can step in to take over payments to stay current. Arrange your direct access to account information with the lender at the time of co-signing so that it’s built into the contract.

– Keep track of the primary borrower's whereabouts. Good communication between you is the best early warning of problems. Do this for the life of the loan.

– Private lenders and the federal government use third-party debt collection services. These may become very aggressive. Early in May 2014, the Justice Department reached a $96 million settlement with Navient, part of the large lender Sallie Mae, over its charging illegally high interest rates and late fees on student loans to military service members. (Navient admitted no wrongdoing.) The following week, the National Consumer Law Center filed suit against the U.S. Department of Education for allegedly violating the Freedom of Information Act by withholding records of its bonus plans to contractors that in effect, incentivized overly hard-nosed – and often outright illegal – debt-collection practices.

If you already have inked the line for someone, brace yourself: The situation on loan repayments is actually worse than it looks. Because students can stop the clock on repaying many loans by re-enrolling in school or by using deferral plans, some experts say there is a even higher, so-called “hidden delinquency rate” whose reckoning day is still to come. It’s a good idea to find out what consumer protections may be available to you now, just in case.

The Bottom Line

By far the safest path is not to co-sign anyone’s student loan, but if you feel you must, or if you already have, stay on top of it. And take care of yourself – if you should die suddenly, the balance of the loan may come due all at once  and swamp the finances of the very person you've been trying to help.