Beyond the financial complications, cosigning for a child or grandchild can bring up uncomfortable relationship issues. One grandchild might feel slighted, for instance, if another receives what's perceived to be disproportionate financial assistance. Such arrangements "can lead to conflict," commented Gary Schwartz, an advisor at Madison Planning, in West Harrison, N.Y. "In family finances, equal and fair are often not the same."
But of course, it is precisely this sort of strong emotion that often leads to offers of cosigning. “This is an unusual maneuver that’s likely triggered by emotions or family dynamics," observed Brian Mercado, a certified financial planner at JSF Financial, in Los Angeles. "Financial decisions based on emotions are usually not advisable."
However well intended, there may be better alternatives. Instead of cosigning a loan, advisors suggest a number of other ways to help with educational expenses. “I’d rather a client open a 529 plan," said Schwartz, at Madison Planning, referring to the tax-advantaged, state-sponsored college-savings accounts. "In addition to the regular benefits, when a 529 plan is in a grandparent’s name [as opposed to the student's] it is usually not included by schools when determining financial aid."
Other ideas include opening a Coverdell Education Savings Account, which is similar to a 529 but with a contribution cap (the current limit is $2,000 per student), or pay tuition expenses directly to the school. Such educational gifts are exempt from gift-tax calculations.
Speaking of gift tax, a philanthropic grandparent could always assist a needy relative with a direct donation. "One option is to gift money to the grandchild each year, up to the IRS annual exclusion amount, without any gift tax implications," said Herd, at TFC Financial. In 2018, the annual exclusion limit is $15,000 per recipient.