Recently much has been made of the garnishing of Social Security payments for seniors who have defaulted on federally insured student loans. In most cases, these are not people who have defaulted on student loans for their own educations but those who have taken out loans for children or grandchildren. This seems like adding insult to injury, given the minute amounts one receives back after a lifetime of contributions from Social Security. If you live until the ripe old age of 85, you might get your money back and a bit of interest. If you die at 65, too bad. (Hence the reason this blog is always advocating private retirement accounts instead of the pay-as-you-go Social Security system.)
This shows, however, why you should never take out a loan for someone else, or co-sign on a loan. Realize that the banks spend a lot of time looking at statistics and figuring out who is likely to pay back a loan and who is not. As seen in the housing crash of 2008, even they make loans they should not, largely under the prodding of Congress. They make money when they lend it out, so they will loan to anyone they can. If they won’t loan to someone, it means that person is a very risky borrower.
If you take out a loan or co-sign for a loan for someone whom the banks will not lend money to, you are putting yourself in a very risky position. Chances are good that the person will default, leaving the collectors calling you for the balance. This is bad for you because it will ruin your credit and possibly your retirement. This is bad for the person you’re signing the loan for because it will hurt their credit, encourage them to take out a loan they will not be able to repay, and not encourage them to do the things that will make them succeed like save up a good down-payment, get a good job with a steady income, and budget their money.
It really isn’t a bad thing for a recent college grad to be riding a bike or the bus until they can afford a car. It is even better if they save up enough to buy that first car for cash and never have a car payment in their lives.
If you really feel you must help someone out, however, consider giving them a loan personally. Realize that you will probably not see this money again, but at least you will not be facing creditors and have to pay lots of interest and fees should they fall behind on the payments. Realize that this will probably change your relationship, however, and it will likely feel uncomfortable sitting around the Sunday dinner together. Suddenly that trip they take or that new coat they buy will be a huge irritant to you because you cannot afford to buy those things and they are taking money from you.
Perhaps the best thing to do, besides helping them figure out how to become loan worthy or just save up the money on their own, is to just make a gift. That way you won’t be expecting the money back and the relationship will remain the same. If it becomes more than just one gift for a special reason, however, you may be an enabler. Like giving a drunk a drink, this is not healthy for them or for you. Sometimes people need to be made to stand on their own and face a bit of adversity. Everyone needs to live in the run-down apartment and scrimp and save for a while.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.