Approximately 90 percent of private student loans had a parent cosign a loan, according to a 2012 report from the Consumer Financial Protection Bureau (CFPB) and U.S. Department of Education. That’s a significant increase from previous years.
Many young adults headed to college aren’t in the position to work with lenders. That’s because they don’t have enough credit history to qualify with private student loan lenders.
Their credit scores usually aren’t high enough, either. And, most students can’t show enough income to prove they can afford to repay what they borrow.
That’s why most parents find themselves signing on the dotted line to help finance education costs. The loan is in the student’s name and they are responsible for paying it off when it’s due. But cosigners still take on a lot of risks.
Before you cosign a loan, here are five questions you should ask as a parent.
1. What happens when I cosign a loan?
When you cosign a loan, you agree to take on the responsibility of repaying the loan should the original borrower default.
You don’t borrow any money yourself. The loan and the amount borrowed will go to your student.
In an ideal scenario, you help your student get the loan. You do not make payments because the student is the borrower and they are primarily responsible.
2. Why should I cosign a loan for my child?
Most private student loan lenders require a cosigner before approving a new loan to a student.
That’s because borrowers must display a strong credit history to qualify for these loans on their own.
Yet, even if a student has a credit history, they may not have had time to build up a good credit score.
Credit scores are largely based on a history of on-time payments made in full. However, credit scores are also based on the average age of each line of credit on your report.
For an 18-year-old on their way to college, they just don’t have enough time to create a good credit score needed to qualify for a loan and secure a good interest rate.
Income is also an issue when signing up for a private student loan.
Most private student loan lenders require borrowers to show they have the income to reasonably afford to repay the loan. College student incomes rarely make the cut.
Parents can help fill these gaps when they cosign a loan. If you have a good credit history, a strong score, and can show you have the income to repay the loan if your student stops making payments.
Parents co-sign loans because it helps their students. And if your student makes their loan payments on time and in full, it may help bump your own credit score.
But the risks tend to outweigh that small reward.
3. What are the risks associated with cosigning for a loan?
Cosigning for a loan allows your child to access a financial product that might otherwise be out of their reach.
However, you do risk ruining your credit and damaging your financial standing.
When you cosign a loan, you agree to take on the responsibility of that debt if your student fails to make payments. That’s a legal obligation. And the lender can come after you and your assets.
It doesn’t matter what the reason is if your child is unable to make student loan payments. You’re responsible if the borrower doesn’t pay.
In addition to having payments put on your plate, your credit score will suffer if you student fails to repay their private student loans.
Even if your child does a great job of managing payments and repaying the debt, cosigning for a loan increases your debt-to-income ratio since the loan appears on your credit report. This could also impact your ability to take out your own loans in the future.
Additionally, your relationship with your child could suffer serious damage if you experience any of these financial consequences. While everyone may enter the agreement with the best of intentions, money issues can tear families apart.
4. What are the risks for my child when I cosign a loan?
When cosigning for a loan, you put your credit and financial status on the line. But helping your student take out a private loan by cosigning may also put them at risk later on down the road.
Many lenders will put private student loans into default if a cosigner passes away. The same is true if the cosigner files bankruptcy.
Auto-default means the lender can require the entire balance of the loan. The borrower’s financial situation or payment history doesn’t matter.
If a loan goes into default it can damage the borrower’s credit. Debt collections can also start if they can’t immediately repay the remaining balance.
Parents can try to prevent these unintended consequences for students. You can go to your lender to request a cosigner release, but that isn’t always easy.
That’s why the CFPB put together a cosigner release resource guide. It helps parents and their children walk through the process of successfully getting a cosigner release on a student loan.
5. What are alternatives to cosigning a loan?
Cosigning for a loan is not the only way to help your student pay for college. As a parent, you can also consider these alternatives for them.
Help your student look for scholarships and grants.
Although the cost of college is on the rise, borrowing money may not be necessary. Look for programs from schools, private institutions, and the government.
You don’t need to repay scholarships or grants. That’s why these are always the best routes to take before getting loans.
Get a federal student loan.
Always fill out and submit an FAFSA before looking into private student loans. This will show you what federal student loans your student can receive.
Federal student loans usually come with lower interest rates and do not require a cosigner.
Create an informal, family loan.
Can you and your student agree that you’ll provide a set amount for school expenses if they’ll pay you back?
This may be a better way to work out college financing than going through a lender, who will charge interest.
You still take a risk that your money won’t be repaid. But it may be a risk you feel more comfortable with than the ones you take on as a cosigner.
Research ways to get a private student loan without a cosigner.
These are actions your student can take to get the loan they need to pay for school on their own.
Should you cosign a loan for your child?
Again, cosigning for a loan on behalf of your student comes with both benefits and risks.
Now that you understand them both, take that knowledge and make the decision that’s best for your family financially.
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1 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
2 Important Disclosures for College Ave.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or M.Y. Safra Bank, FSB, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
(1)All rates shown include the auto-pay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
(2)This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
(3)As certified by your school and less any other financial aid you might receive. Minimum $1,000.
Information advertised valid as of 11/4/2019. Variable interest rates may increase after consummation.
3 Important Disclosures for Discover.
Discover's lowest rates shown are for the undergraduate loan and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
4 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restrictions. Loans are offered through CommonBond Lending, LLC (NMLS #1175900).
5 Important Disclosures for Ascent.
Before taking out private student loans, you should explore and compare all financial aid alternatives, including grants, scholarships, and federal student loans and consider your future monthly payments and income. Applying with a cosigner may improve your chance of getting approved and could help you qualify for a lower interest rate. Ascent Student Loans may be funded by Richland State Bank (RSB). Ascent Student Loan products are subject to credit qualification, completion of a loan application, verification of application information and certification of loan amount by a participating school. Loan products may not be available in certain jurisdictions, and certain restrictions, limitations; and terms and conditions may apply. Ascent is a federally registered trademark of Turnstile Capital Management (TCM) and may be used by RSB under limited license. Richland State Bank is a federally registered service mark of Richland State Bank.
* Application times vary depending on the applicant’s ability to supply the necessary information for submission.
5 Important Disclosures for Citizens.
Undergraduate Rate Disclosure: Variable rate, based on the one-month London Interbank Offered Rate (“LIBOR”) published in The Wall Street Journal on the twenty-fifth day, or the next business day, of the preceding calendar month. As March 1, 2020, the one-month LIBOR rate is 1.62%. Variable interest rates range from 2.72% – 10.98% (2.72% – 10.83% APR) and will fluctuate over the term of the loan with changes in the LIBOR rate, and will vary based on applicable terms, level of degree earned and presence of a co-signer. Fixed interest rates range from 4.72% – 12.19% (4.72% – 12.04% APR) based on applicable terms, level of degree earned and presence of a co-signer. Lowest rates shown requires application with a co-signer, are for eligible applicants, require a 5-year repayment term, borrower making scheduled payments while in school and include our Loyalty and Automatic Payment discounts of 0.25 percentage points each, as outlined in the Loyalty Discount and Automatic Payment Discount disclosures. Subject to additional terms and conditions, and rates are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change. Please note: Due to federal regulations, Citizens One is required to provide every potential borrower with disclosure information before they apply for a private student loan. The borrower will be presented with an Application Disclosure and an Approval Disclosure within the application process before they accept the terms and conditions of the loan.
Federal Loan vs. Private Loan Benefits: Some federal student loans include unique benefits that the borrower may not receive with a private student loan, some of which we do not offer with the Education Refinance Loan. Borrowers should carefully review their current benefits, especially if they work in public service, are in the military, are currently on or considering income based repayment options or are concerned about a steady source of future income and would want to lower their payments at some time in the future. When the borrower refinances, they waive any current and potential future benefits of their federal loans and replace those with the benefits of the Education Refinance Loan. For more information about federal student loan benefits and federal loan consolidation, visit http://studentaid.ed.gov/. We also have several resources available to help the borrower make a decision at http://www.citizensone.com/EdRefinance, including Should I Refinance My Student Loans? and our FAQs. Should I Refinance My Student Loans? includes a comparison of federal and private student loan benefits that we encourage the borrower to review.
Citizens One Student Loan Eligibility: Borrowers must be enrolled at least half-time in a degree-granting program at an eligible institution. Borrowers must be a U.S. citizen or permanent resident or an international borrower/eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For borrowers who have not attained the age of majority in their state of residence, a co-signer is required. Citizens One reserves the right to modify eligibility criteria at anytime. Interest rate ranges subject to change. Citizens One Student Loans private student loans are subject to credit qualification, completion of a loan application/consumer credit agreement, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens One Student Loans-participating school.
Please Note: International Students are not eligible for the multi-year approval feature.
Loyalty Discount Disclosure: The borrower will be eligible for a 0.25 percentage point interest rate reduction on their loan if the borrower or their co-signer (if applicable) has a qualifying account in existence with us at the time the borrower and their co-signer (if applicable) have submitted a completed application authorizing us to review their credit request for the loan. The following are qualifying accounts: any checking account, savings account, money market account, certificate of deposit, automobile loan, home equity loan, home equity line of credit, mortgage, credit card account, or other student loans owned by Citizens Bank, N.A. Please note, our checking and savings account options are only available in the following states: CT, DE, MA, MI, NH, NJ, NY, OH, PA, RI, and VT and some products may have an associated cost. This discount will be reflected in the interest rate disclosed in the Loan Approval Disclosure that will be provided to the borrower once the loan is approved. Limit of one Loyalty Discount per loan and discount will not be applied to prior loans. The Loyalty Discount will remain in effect for the life of the loan.
Automatic Payment Discount Disclosure: Borrowers will be eligible to receive a 0.25 percentage point interest rate reduction on their student loans owned by Citizens Bank, N.A. during such time as payments are required to be made and our loan servicer is authorized to automatically deduct payments each month from any bank account the borrower designates. Discount is not available when payments are not due, such as during forbearance. If our loan servicer is unable to successfully withdraw the automatic deductions from the designated account three or more times within any 12-month period, the borrower will no longer be eligible for this discount.
|2.75% – 10.65%*,1||Undergraduate and Graduate|
|2.84% – 10.97%2||Undergraduate, Graduate, and Parents|
|2.80% – 11.37%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|3.14% – 11.88%5||Undergraduate and Graduate|
|2.72% – 10.98%6||Undergraduate and Graduate|