Picture this scenario: your child has been accepted to the college of her dreams and will be crushed if she isn’t able to attend. You know she will prosper at that college, but you also have no idea how to pay the astronomical tuition. Is cosigning a student loan an option?
First: Take a deep breath. You’re going to find a way, because that’s what you do. Next, take an honest assessment of your assets and look for money you can use that you don’t have to pay back to a lender.
This means supplementing college savings with scholarships, grants and work-study programs. Once you’ve exhausted those means, explore federal student loans by filling out the Free Application for Federal Student Aid (FAFSA) form and understanding what types of federal loans are available to your child.
And last, consider cosigning a private student loan with your child.
But exactly what does it mean to have a parent cosign a private student loan? When a parent agrees to cosign a loan, the student is the primary borrower on the loan, but the parent is agreeing to take on all payment obligations on the loan if the student is unable to do so at any point. If the student fails to make a payment on the loan, the lender will look to the cosigner to step in and make the payment.
Cosigning is pretty common. In fact, a 2012 report published by the Consumer Finance Protection Bureau (CFPB) found that by 2011, more than 90% of new private student loans were co-signed.
But, should YOU cosign your child’s student loan? Well…it depends. Here are some pros and cons to consider before you sign on the dotted line.
Pros of Cosigning Your Child’s Student Loan
You Will Help Your Child Reach His Dream
Helping your child close the financial gap to attend the college of his choice will help him on chosen career path. Opening that door for your child could be among the best investments you can make.
Your Child Will Likely Get a Better Interest Rate
It is nearly impossible for students just graduating high school to take out a private loan without a cosigner. With no established credit or sustainable work history, lenders will often require the student have a cosigner on the private loan. Or, it might be that your child is able to obtain a loan, but will get a substantially better interest rate with a cosigner.
Many Lenders Will Release the Cosigner if the Student Demonstrates Responsible Repayment
When you’re looking at different lenders and the loans they are offering, one of the most important things you should look for is whether the lender will release the cosigner from the loan if the borrower makes timely payments. Once the paperwork is processed, the cosigner has no further repayment obligations on the loan.
Cons of Cosigning Your Child’s Student Loan
Your Name and Credit History Are on The Line
When you co-sign a loan, the lender will look at your credit history. The loan will appear on your credit report as an obligation that you owe, which can impact any future loans you might want to take on your own in the future (such as a mortgage or car loan). Any adverse activity on the student loan, such as default or bankruptcy, will show up negatively on your credit history as well.
Read and Understand the Fine Print
Many private student loan lenders will include auto-default clauses in the loan documents. These clauses state that if the cosigner either dies or files for bankruptcy, the borrower on the student loan (your child) will automatically be put into default on the student loan, regardless of payment history or ability. Further, some lenders will include universal default clauses, which state that if the borrower or cosigner is not in good standing on a separate loan with the same lender (such as a mortgage or car loan), then the lender will trigger a default on the student loan. Cosigning a loan means that both the parent and student need to remain in good standing on all loans with the lender.
It Might Be Difficult to Be Released from the Loan
A 2015 CFPB report found that while private student loan lenders advertise options for releasing cosigners from loans, very few releases were actually granted by lenders. In fact, lenders rejected 90% of borrowers who applied for cosigner release. As you investigate loans, have the lender provide you in writing with the exact criteria needed to obtain a release and be prepared to jump through several hurdles to get there.
Your Relationship Might Be at Risk
When a student is unable to repay his student loan, parents can easily be put into a stressful situation. Parents cosigning a loan should consider the student loan as their own and assume that they will need to make payments. Before you cosign a loan, you and your child should have an agreement outlining what will happen if payments are not made.
Before you cosign your student’s private loan, understand the exact terms of the loan and weigh whether the pros outweigh the cons. Cosigning your child’s student loan can easily be your child’s ticket to a successful future as long as you are both aware of the potential consequences.
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This information is intended for informational and educational purposes only and not as legal advice. If you have concerns about your credit report, harassment, identity theft, illegal collections activity, garnishments, or property liens, you should consult an attorney who specializes in consumer rights and defense.