Should You Cosign Your Child's Student Loans?

With little to no credit history and minimal income, students fresh out of high school, and even older, are finding it difficult to qualify for private student loans on their own.

That’s why many parents and even grandparents are being asked to co-sign for these student loans.

What should you do if your child asks you to co-sign a student loan?

Before you say yes, read on to learn about the risks involved and how they might affect your own financial security.

Loan Application Terminology

The student loan application process can be confusing.

Before getting started, it’s helpful to know some common terms, including:

  • Borrower: The borrower is the student, who signed and agreed to the terms of the loan. This person is responsible for paying back the loan in full, through on-time loan payments that include interest and fees.
  • Co-signer: A co-signer shares the responsibility with the borrower to pay back the loan. This person is legally responsible to repay the debt if the borrower cannot pay back the loan, plus any associated costs and late fees. The lender can attempt to collect any unpaid money from the cosigner, without even trying to contact the borrower first. The cosigner assumes all risk associated with the loan. Often this person is a parent, grandparent or legal guardian.
  • Lender: The lender, also known as a creditor, is the entity, in this case, the federal government or private lender, that provides a specific amount of money to a borrower, with the expectation that the money will be repaid according to the loan terms.
  • Co-signer release: A co-signer can be released from all financial obligation and is no longer responsible for the loan once specific repayment criteria are met. Co-signer release requirements are detailed in the private student loan application. Private lenders offer different co-signer release options.
  • Federal loans: Federal loans are funded by the federal government for the purpose of higher education.
  • Private loans: Private student loans are issued by banks, credit unions, state loan programs, and online lenders, to pay for tuition and higher education-related expenses not covered by federal loans.

More on Federal Loans

Federal student loans are available to U.S. citizens who attend an accredited school or university, at least part-time.

To apply for federal loans, a student must complete the Free Application for Federal Student Aid (FAFSA) form each year.

The student is the only one responsible, and on the hook, to pay back federal loans.

Most federal student loans do not require a co-signer.

The exception is a Direct PLUS loan under a situation where the borrower doesn't have good credit.

Federal loans typically have more favorable terms.

The payback process doesn’t begin until after graduation or if the student is no longer enrolled at least part-time.

In addition, federal loan interest rates are set by Congress at a fixed rate that is often lower compared to private loans.

Students who apply for federal loans don’t need a credit check to qualify for the loan.

When that dreaded repayment time does finally come around, many, if not all, federal student loans are eligible for various income-driven repayment programs. These repayment programs could help you as the student manage monthly payments, reduce your loan balance, or even may wipe out your student loans altogether. 

Taking a federal student loan helps students establish a good credit record that is invaluable to their financial success.

More on Private Student Loans

Many students find themselves needing additional money to cover tuition and expenses, so they apply for private loans in addition to federal loans.

This is when it might be beneficial for them to have a parent or another trusted individual cosign on this loan.

One of the main reasons that students seek out a parent or trusted individual to cosign the loan is because private loans require an established and healthy credit record.

Many students, especially those starting college right after high school graduation, do not have an established credit history.

Private loan interest rates are higher than federal loan interest rates, and that rate is established based on the borrower’s credit score.

If the borrower does not have an established credit history or has a poor credit score, they will not qualify for the loan.

If a cosigner agrees to sign the loan, their credit score determines eligibility for the loan and the interest rate.

Examples of private student loan providers

Lender Borrowing Amounts Available Terms
Wells Fargo $1,000 to $120,000 5-, 10-, 15-, and 20-year terms
Citizen's Bank $10,000 to $90,000 5-, 10-, 15-, and 20-year terms
Discover Bank $5,000 to $150,000 5-, 10-, and 15-year terms
CommonBond $1,000 to the amount your schooling costs 5-, 10-, and 15-year terms
College Ave $2,000 to the amount your schooling costs 8-, 10-, 12-, and 15-year terms
PNC $1,000 to $40,000 5-, 10-, and 15-year terms
SallieMae $1,000 to the amount your schooling costs 5-, 10-, 15-, and 20-year terms

Who Can Co-sign a Loan?

In theory, anyone who is 18 years or older, and a U.S. citizen or U.S. national, can agree to cosign a student loan.

In reality, it’s typically a parent, grandparent, legal guardian, or close friend.

Often times, a parent is considered the most logical choice. This is not always an option, even if the parent has the best intentions to help their child.

Who Should And Shouldn't Cosign On A Student Loan

People who SHOULD cosign on a student loan: People who SHOULDN'T cosign on a student loan:
  • Your mom and/or dad
  • Your grandparents
  • A legal guardian
  • A very, very close friend or family member
  • Your boyfriend or girlfriend
  • Your spouse if married for a short time (or maybe even for a long time)
  • Your coworker
  • A friend or acquaintance
  • Your boss, your neighbor, your roommate, or anyone you do not have a close, strong, personal relationship with
  • A cosigner has to be able and willing to pay back the loan in case the borrower cannot.

    Not everyone is fortunate enough to have a large savings account or the means to repay the debt.

    Additionally, a cosigner has to have good credit and financial security in order to assume the risk of the loan.

    Pros and Cons of Co-signing

    Before you put your financial future on the line for your loved one, consider the advantages and disadvantages.

    Disadvantages

    There are significant downsides for assuming financial responsibility for someone else.

    Lenders will try to convince you otherwise, without focusing on the possible negative and expensive consequences.

    Some of the most important, negative factors to consider before you agree to co-sign are:

  • The new loan amount will affect your debt-to-income and debt-to-credit ratio
  • You might not qualify for additional credit you need down the line, like a mortgage or car loan if your debt-to-income ratio is poor; plus, your credit score might take a hit since this ratio accounts for 30% of your FICO score
  • If the borrower is late on a payment, the lender will come after you as the cosigner (payment history, including any late payments, account for 35% of your FICO credit score)
  • The lender has a right to reject the cosigner release agreement, even if the student meets the requirements
  • Some private student loans require payments while the student is still in school, so if the student does not have a steady income - there is a possibility that they can’t afford the payment - then you will be responsible to make these payments on their behalf
  • Private loans are not regulated by the government, so the lender sets the terms and conditions
  • Filing for bankruptcy won’t necessarily wipe out outstanding student loans, so if either the borrower or cosigner file bankruptcy, the private student loan automatically goes into default (this is often a clause included in the fine print of the loan agreement)
  • Your relationship might be impacted if the borrower is unable to pay back the loan; or worse, just simply chooses not to
  • Advantages

    Despite the risks associated with cosigning a loan, you might decide that it’s the best decision for you and your family.

    Acting as a cosigner on a private student loan can help someone achieve one of their biggest goals.

    Having the opportunity to attend and afford college is a luxury that many people take for granted.

    Without your agreement, this dream may not become a reality.

    Whether it be a trade school, community college or Harvard, the benefits of higher education go far beyond the prospect of financial independence.

    Other Ways to Pay for School

    With a little effort and creative thinking, there are ways that you and your child can help pay for college without possibly causing havoc on both your financial futures, such as:

    Write a check

    If you have a decent amount of money in the bank, writing a check directly to the accredited school can actually save you money on your taxes.

    You might qualify for up to $2,500 in tax credit thanks to the American opportunity tax credit.

    You’ll need to pay for at least $4,000 for tuition or qualifying expense from a checking or savings account, and meet other criteria, in order to qualify.

    Apply for scholarships

    From Fortune 500 companies to your local Rotary club, there really is something for everyone.

    High school guidance counselors are a great resource and going even further, there are websites that can also help navigate the thousands of scholarships out there.

    Haggle over financial aid

    Once the financial aid process is done and the amount of financial aid and federal loans is determined, experts suggest writing a formal letter to the university requesting more money.

    Following up with a phone call or stopping by in person can’t hurt as well.

    Find a part-time job

    Working part-time throughout college can help offset some of the costs.

    Encourage your child to look for a job on campus so when the school is closed for holidays and breaks, most likely your child will have off as well.

    Conclusion

    Student loans, especially as the cost of tuition continues to rise, can last for a very long time, over decades.

    The financial burden and emotional strain associated with cosigning can take a toll on everyone involved.

    Generally, it is not a good idea for a parent to cosign on a child's student loans, so if you can find another close family member to be the cosigner, opt for that - or even better - exhaust all of the financial aid you possibly can. 

    Luckily, there are alternatives to cosigning a private loan that will still turn your child’s college dreams into reality.

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