Should You Cosign a Student Loan? What Parents Need to Know
Nothing makes a parent prouder than when their child receives a college acceptance letter. Then, the bitter reality of how much that degree will cost sets in. For most families, paying college expenses means taking out student loans. If you’re lucky, the majority can be covered by federal financial aid. But in some cases, especially for those attending out-of-state institutions, you may need to consider private student loan options, too. As a parent, it may seem like a no-brainer to help your child fulfill their collegiate dreams, but should you cosign on a student loan? Here are some important things to consider before signing on the dotted line.
Key Takeaways
Cosigning a student loan can help your child access funds for college, but it also makes you legally responsible for the entire loan balance if they can’t make payments.
Review your finances and loan terms carefully before agreeing to cosign to ensure it won’t negatively impact your credit or long-term financial goals.
Explore all federal aid, grants, and scholarships first, and consider options like home equity loans before turning to private student loans.
Who Can Cosign on a Private Student Loan?
It’s not uncommon for private student loan lenders to require a cosigner. Generally, most students do not have a credit history long enough or healthy enough to take out a loan on their own merit. What might surprise you, however, is that a cosigner doesn’t have to be a parent. If your credit score is not in the best shape, you can always ask another relative or even a family friend to cosign on the loan.
The important thing to remember is this – anyone who cosigns will be legally responsible for the repayment of the loan, regardless of your child’s educational outcome. So, you must understand the pros and cons of becoming a cosigner before agreeing to make this commitment.
Pros of Cosigning a Student Loan for Your Child
The most obvious plus for being a cosigner is that it helps your child go to college. Other pros may include:
- Better Interest Rates – if your credit history is very good or excellent, the interest rate will typically be much lower than those with lesser credit scores. This can lead to significant savings over the life of the loan.
- Helping Your Child Build Credit – since your child will be on the loan with you, making on-time payments, or paying off the loan early, can give your child’s credit score a boost, too!
- Personal Joy – the emotional satisfaction of knowing you are helping your child reach their collegiate dreams cannot be underscored. As a parent, seeing your child happy and successful is a deeply positive experience.
Another pro is the option for cosigner release. Many private lenders allow a cosigner to be removed after a certain number of on-time payments are made, or if your child’s credit score improves enough to carry the loan alone.
Risks and Cons of Cosigning a Private Student Loan
We wish we could say that there was nothing but pros when it comes to cosigning on a private student loan, but that would be inaccurate. There are several cons you must consider before taking on this debt, including:
- Legal Responsibilities – as a cosigner, you are equally responsible for the entire loan balance.
- Credit Impact – taking on this debt can impact your credit in multiple ways. For one, it may make it more difficult to get other financing (credit cards, loans, etc.) because it will likely increase your credit utilization ratio. If your child misses any payments, your score could take a hit, too.
- Financial Toll – speaking of missed payments, if your child isn’t in a position to make the student loan payments, you may need to step in, which could create a financial strain on your finances.
- Relationship Risks – nothing drives a wedge faster than money when it comes to family. In this case, you may strain your relationship by refusing to cosign. You could also find yourself resenting cosigning if repayment lands back in your lap or your credit gets ruined.
Alternative Financing Options
As we stated earlier, exhausting your federal financial aid options should always be a priority before even considering any private student loan options. You should also encourage your child to pursue available grants and scholarship opportunities, as these can help cover books, housing, and even meals. They are also typically considered “free money” and do not need to be paid back.
If you have available equity in your home, you may also want to look into taking out a personal loan or home equity loan. You may be offered better interest rates and financing terms by going through your bank.
Should You Cosign on a Student Loan – Things to Consider
Before you take the final leap and sign on that dotted line, be sure to check these items off your list first.
- Have a Candid Conversation With Your Child. As a parent, we always try to give our children what they want. Unfortunately, sometimes their expectations are unrealistic. Make sure your child fully understands the financial aspects of their decision to attend college. Compare costs at more than one campus and choose one that works within your family’s budget.
- Review Your Finances. Before agreeing to take out a private loan, make sure you review your budget and available finances. You don’t want to create a hole you can’t dig yourself out of or put yourself in a position where you can’t meet your own needs. This is especially true if you expect to retire soon or if there’s a chance your income may be decreasing in the near future.
- Thoroughly Review The Loan Details. Never sign a loan agreement without fully reviewing the terms and conditions of the loan. Make sure you understand the interest rate and repayment terms. It’s also smart to inquire about any deferment or forbearance options, just in case you need assistance in the future.
Ultimately, cosigning on a private student loan is a personal decision that should not be made lightly. Be sure to weigh the pros and cons, consider alternative financing options, and have a candid discussion with your child before taking on any student loan debt.
