Thinking of Cosigning on a Student Loan?
When your child gears up to go to college, cosigning for their student loans may seem like a good idea. It’s normal as a parent to feel like you should lend a hand when lenders offer financial aid to your freshly enrolled college student. In fact, 92 percent of undergraduate private student loans had a cosigner in 2017-2018, a number that has risen significantly since 2008-2009, when it was 74 percent.
Cosigning certainly has its benefits. For your child, it means that they are more likely to get approval on a private student loan. If you have a solid credit history, it also means the rate on the loan will be lower than if your child were to apply for the loan independently. This means that cosigning can save you and your child money throughout the lifetime of the loan.
However, cosigning on a student loan can have serious consequences on your financial health, especially further down the road. Cosigning is not as simple as a glowing character reference from you for your student; it means that you are guaranteeing that you can pay the debt in the event that your child cannot.
Here are some real implications to consider before cosigning on that student loan:
1. Cosigning a loan will raise your debt-to-income ratio.
While this may not have an impact on your life currently, it does have long-term effects on your credit score. The student loan is essentially your loan. This can make it much more difficult if you have plans to take out a mortgage, refinance an existing mortgage or get a loan to buy a new car.
2. If your student does not pay the loan on time, the cosigner is responsible for the full amount of the debt, including late fees or collection costs.
Ideally, your child will find the perfect job right after graduation and have no issue paying their student loans back. However, that’s not always the case. In 2016, 43 percent of students with federal student loan debt weren’t making payments or were behind on their payments. No matter how well you plan to repay the loans, you can’t predict how your college student will follow through. As a cosigner, you can request to be notified if your child misses a payment. This way, you can ensure you have the time and warning to prepare to make any necessary payments. Make sure that you have copies of all important papers related to the loan and its terms so you have the full picture of your responsibilities as a cosigner.
3. If you unexpectedly die or declare bankruptcy, cosigning may put your child in immediate default on the loan.
Many private student loans contain a clause that allows the lender to call the loan in full in situations where a cosigner passes or declares bankruptcy. Even if you made every payment on time before, this can ruin your child’s credit and overall financial well-being. Some lenders will allow a cosigner to be released from a private student loan under certain conditions (typically after a chosen number of consecutive, on-time payments and a satisfactory credit check to ensure the borrower can pay the loan back independently). Cosigner releases are not easy to get though; in 2015, 90 percent of applications for cosigner releases on private student loans were rejected. If your cosigner release is rejected, you will need to plan to protect your child’s financial health no matter what.
It’s important to note that cosigning on a private student loan is different than taking out a Parent PLUS Loan, a federal loan. On a Parent PLUS Loan, you are the primary borrower. Meanwhile, cosigning a private loan keeps your student as the primary borrower.
Student loans can help your child achieve their dreams. But they also can be very stressful to pay back, especially when loan providers don’t always offer the assistance needed. If needed, you can always contact a professional who can help you make a plan to handle student loans.
Disclaimer: The viewpoints and information expressed are that of the author(s) and do not necessarily reflect the opinions, viewpoints, and official policies of any financial institution and/or government agency. All situations are unique and additional information can be obtained by contacting your loan servicer or a student loan professional.