Dear Penny: Did Co-Signing My Daughter’s Student Loan Kill My Chance of Retiring?

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Dear Penny,

I’m hoping to retire in four years. I have $3,000 in credit card debt and $60,000 in auto and RV debt. I’m planning on selling my house and using the equity to buy a smaller house and not have a mortgage.

Here’s the problem: My daughter lost her job and cannot pay the student loans I co-signed many years ago. My debt-to-income is too high, so the bank will not give me any more money, such as a home equity line of credit or loan.

I can take money out of my retirement to pay the school loans, but that will leave very little left for retirement. I can’t find any assistance for co-signers of school loans.

My daughter is estranged from me, so she has no intention of helping me or even finding employment.

I don’t know if I will ever be able to retire, or if I’ll end up with enough equity to move without being able to get a small mortgage if needed. Do you have any advice on how to handle?

-S.

Dear S.,

The fact that you haven’t been able to find resources for student loan co-signers isn’t surprising, because there aren’t many options in this situation.

When you co-signed your daughter’s student loans, you and your daughter became equally responsible for repaying them. And since your daughter can’t make the payments, the burden falls on you. You’re just as obligated to pay back these loans as you would be had you taken them out for your own education.

Because federal student loans rarely require a co-signer, I’m assuming these are private student loans. So unfortunately, your options for lowering your monthly payments will pretty much be at the discretion of your lender.

I say all that not to scare you. I can only imagine how the financial pressures you’re feeling are compounded by the heartache over being estranged from your daughter.

But it’s important to approach this situation realistically. As you probably know, student loans are almost never discharged in bankruptcy. So your only options are to pay them off or go into default.

The latter will destroy your credit and could result in your wages being garnished. But the option you suggest — of using your retirement funds to pay off your debt — would put your finances in seriously shaky territory.

The first thing I want you to do is repeat after me: “I will not use my retirement savings to pay off debt.” Repeat if necessary. That money’s purpose is to support you during your golden years, not to pay off debt. And unlike a bank account, a retirement fund is protected from creditors if you’re sued or file bankruptcy.

Your best option is to get rid of your other debt so you can free up money to put toward your student loan balance. Doing so, you’ll also lower your debt-to-income ratio, which your bank will probably require to be at 43% or lower to approve you for a mortgage or home equity loan.

Based on what you’ve told me, your best option might be to sell the RV and car, then downsize to a cheaper used car. A more radical approach would be to sell your house now and live out of the RV.

If you’re not willing to part with your house or your vehicles now, you could try earning extra income to pay down the loans by renting out the RV and part of your house.

As for your plans to retire: You say you plan to retire in four years, but you also say you don’t know if you can ever retire. Maybe the realistic plan falls somewhere between four years and forever. You may have to retire a few years later than you’d hoped, but you will get to retire eventually.

Regardless of when that day comes, you’ll be a lot more comfortable if you bring as little debt as possible into your retirement years.

Robin Hartill is a senior editor at The Penny Hoarder and the voice behind Dear Penny. Send your questions about student loans to [email protected]