If you’re looking into the pros and cons of cosigning a student loan, your college-aged student has most likely hit the limits of their federal loans, as cosigning is mainly associated with private student loans.
Or you might just be proactively looking at all the options available. Either way, it is important to know that cosigning could bring heavy responsibilities for parents.
There are many questions to ask: Should a parent cosign a student loan? If your child chooses to get a private student loan, do parents have to cosign student loans? If it’s a private loan, then most likely the answer is yes.
Whether you should, depends on your tolerance for risk, your child’s projected ability to repay the loan, and if it makes sense for your family.
While there are many caveats to consider when cosigning student loans, alternatives can also help bridge the gap between education costs and what you’re able to pay. Here’s an overview of some key facts to know about cosigning on private student loans.
Why Is Cosigning Student Loans So Popular?
It’s no secret that the cost of college education has skyrocketed. The annual tuition for a private, nonprofit college has more than doubled, to $34,700 , since the 1980s, according to the College Board.
And that doesn’t include room, board, or any other fees. Add those in and you can expect to pay an average of $46,950 a year a year for a nonprofit, private college and $20,770 annually for a four-year, public, in-state university.
And when savings, federal loans, federal work-study, and scholarships can’t fill the gap, students may look to private lenders to help them cover the rest. Unfortunately, students just starting out usually don’t have the credit history needed to get a loan from a private lender, so parents (or other potential cosigners) step in.
But do parents have to cosign a private student loan? Almost always. Since many lenders won’t lend money to young adults with no or little credit history, they typically require cosigners. Roughly 93% of all private student loans have a cosigner.
What Are the Downsides to Cosigning My Child’s Loan?
If you’re looking to privately fund education costs, it means you likely need the help to pay for college, just like many Americans do. But think long and hard about cosigning.
One of the chief considerations before cosigning concerns your relationship with your child. Blood and money often don’t mix. If something goes wrong—missed payments, extended unemployment, or worse, default—the potential for financial stress could create the possibility of misunderstandings and hurt feelings.
Second, cosigning could put your finances at risk. You may have the most responsible young adult in the whole state, but if something goes awry and the loan goes into default, the lender may come after your income or your assets, including potentially garnishing paychecks and seizing homes and cars.
A default might also tarnish your credit score. Simply signing the loan also affects your score. Even if you’re not the one making payments, you’re still connected to the loan according to the major credit bureaus.
What Are Alternatives to Cosigned Loans?
The First Step for Federal Aid: FAFSA®
Do parents have to cosign a private student loan? Not if they can find other sources of funding. One of those options is a federal student loan, of course.
If you’re just beginning the planning process for paying for college, you might start by looking into the federal programs set up to help students with higher education.
Your first step should be to have your child fill out the Free Application for Federal Student Aid (FAFSA®). You’ll add your financial information that will determine the amount of federal assistance, which includes Direct Subsidized Loan, Direct Unsubsidized Loans, and other student aid from the federal government, like grants and work-study.
Building Their Credit Score
There are also some other pathways to consider when trying to find loans without a cosigner. One good idea is to have your child start ramping up their credit history. A credit score is typically enhanced over time as the record of their successful payments grows, along with other factors like their outstanding debt, credit mix, and more.
Your student might start by either getting a secured credit card at a credit union or other financial institution, then showing they can make timely monthly payments on a purchase.
If your student is trustworthy and mature, you could also consider adding them as an authorized user to a credit card you already have. You’ll be responsible for making the monthly payments, but they could benefit from your financial behavior.
Like the real estate mantra concerning location, the college payment mantra might be, “Scholarships, scholarships, scholarships!” Money you don’t have to pay back? Yes, please.
The FAFSA will help colleges determine what scholarships and grants your child can qualify for, but don’t let your student stop there.
Scholarships come in all sizes and from diverse sources, including national foundations, heritage associations, and various writing and other contests sponsored by nonprofits and other organizations. It might help to look at groups that are closely associated with your family.
Keep in mind that your child can apply for scholarships while they are still in college, because some are tied to disciplines, and your student is likely to have settled on a major after the first year or two.
You might also be able to forego cosigning a student loan by making strategic decisions about education costs. Can your student reduce the overall cost of college by ditching the meal plan, living off campus, or even attending a significantly more inexpensive college?
Or, instead of paring down expenses, maybe your student could consider boosting their income to avoid having you cosign on a student loan. One idea might be to take a year off to work—this may be enough to close the gap, avoiding the need for a loan altogether.
Loans for Parents
If you don’t mind shouldering more of the cost, parents can also take out their own federal loans with the Direct PLUS Loan , or “Parent PLUS” program.
Even though your student benefits from the loan, you’ll be responsible for paying it back; their name isn’t on it at all. You may be able to work out an arrangement where your student pays you all or part of the payment amount.
These loans can also be taken out by grad students. Whether a parent or a graduate student, there is a downside for the borrower. The interest rate for Direct PLUS Loans is often higher when compared to other federal student loans—7.8% for the 2019-2020 school year. But you won’t be asking yourself, “Should a parent cosign a student loan?” because you’re helping fill the gap without depending on your student to pay the loan back.
You can also look into private parent student loans that are offered by certain lenders.
Is Refinancing a Smart Play for Your Family?
Once you’ve figured out your loans and scholarships, and your student is near the end of their college days—or they’re considering graduate or doctoral studies—it may be a good idea to start thinking about whether refinancing their student loans could be an option—especially if they wind up with a mix of federal and private student loans.
(That’s because federal loans can be consolidated through a Direct Consolidation Loan , but private student loans can’t be.) Just note that if you refinance with a private lender, you will lose the repayment benefits of federal student loans, like income-driven repayment plans that allow students to pay a percentage of their income and extend the loan terms beyond the standard 10 years, or Public Service Loan Forgiveness (PSLF).
Refinancing with a private lender allows students to take all their loans and refinance them into one new loan, sometimes with a lower rate, depending on their credit and other important financial fitness factors.
Student loan refinancing also allows for flexibility. Many lenders allow well-qualified borrowers to either lengthen the term of the loan, which may lower their monthly payments (but increase the amount they pay overall) or shorten their loan term, which can mean higher monthly payments but a shorter payoff period.
With a little work, you may find many ways to avoid cosigning a student loan—and your finances might be healthier for it.
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