If your child is seeking a private student loan, you’ll likely need to act as their student loan cosigner. New undergraduates typically can’t meet a lender’s requirements for credit and income, so they need a parent to help them qualify.
While the loan won’t primarily be in your name, you’ll still be responsible for the debt if your child can’t pay it back. Plus, the loan will appear on your credit report and hike up your debt-to-income ratio.
Due to these risks, it’s crucial to ask these five questions before cosigning your child’s student loan.
1. What happens when I become a student loan cosigner?
2. Why should I cosign a loan for my child?
3. What are the risks associated with cosigning for a loan?
4. What are the risks for my child when I cosign a loan?
5. What are alternatives to cosigning 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.
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, as well as 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 repaying the loan. College student incomes rarely make the cut.
Parents can help fill these gaps when they cosign a loan. If you have a strong credit history and score, as well as the income to repay the loan, a lender will be more likely to approve the application.
Parents cosign loans because it helps their child. And if your student makes their loan payments on time and in full, it may help bump your own credit score. But the risks could potentially outweigh that small reward.
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 can’t can’t afford to make student loan payments. You’re responsible if the borrower doesn’t pay. The only exception is in the case of permanent disability or death, in which case the lender might discharge the loan.
In addition to having payments put on your plate, your credit score will suffer if your 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.
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 Consumer Financial Protection Bureau 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.
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 a 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.
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.
If you decide a private student loan is right for you, make sure to shop around to find a loan.
Rebecca Safier contributed to this report.
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|1.04% – 11.98%1||Undergraduate, Graduate, and Parents|
|1.25% – 11.35%*,2||Undergraduate, Graduate, and Parents|
|1.05% – 11.44%3||Undergraduate and Graduate|
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|1.78% – 11.89%5||Undergraduate and Graduate|
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|2.46% – 12.98%8||Undergraduate and Graduate|
|* The Sallie Mae partner referenced is not the creditor for these loans and is compensated by Sallie Mae for the referral of Smart Option Student Loan customers. |
1 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.
Rates shown are for the College Ave Undergraduate Loan product and include autopay 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.
Information advertised valid as of 1/27/2021. Variable interest rates may increase after consummation. Lowest advertised rates require selection of full principal and interest payments with the shortest available loan term.
2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
3 Important Disclosures for Earnest.
4 Important Disclosures for CommonBond.
Offered terms are subject to change and state law restriction. Loans are offered by CommonBond Lending, LLC (NMLS # 1175900), NMLS Consumer Access. If you are approved for a loan, the interest rate offered will depend on your credit profile, your application, the loan term selected and will be within the ranges of rates shown. If you choose to complete an application, we will conduct a hard credit pull, which may affect your credit score. All Annual Percentage Rates (APRs) displayed assume borrowers enroll in auto pay and account for the 0.25% reduction in interest rate. All variable rates are based on a 1-month LIBOR assumption of 0.15% effective Jan 1, 2021 and may increase after consummation.
5 Important Disclosures for SoFi.
UNDERGRADUATE LOANS: Fixed rates from 4.23% to 11.26% annual percentage rate (“APR”) (with autopay), variable rates from 1.88% to 11.66% APR (with autopay). GRADUATE LOANS: Fixed rates from 4.13% to 11.37% APR (with autopay), variable rates from 1.78% to 11.73% APR (with autopay). MBA AND LAW SCHOOL LOANS: Fixed rates from 4.30% to 11.52% APR (with autopay), variable rates from 1.95% to 11.89% APR (with autopay). PARENT LOANS: Fixed rates from 4.60% to 10.76% APR (with autopay), variable rates from 1.88% to 11.16% APR (with autopay). For variable rate loans, the variable interest rate is derived from the one-month LIBOR rate plus a margin and your APR may increase after origination if the LIBOR increases. Changes in the one-month LIBOR rate may cause your monthly payment to increase or decrease. Interest rates for variable rate loans are capped at 13.95%, unless required to be lower to comply with applicable law. Lowest rates are reserved for the most creditworthy borrowers. If approved for a loan, the interest rate offered will depend on your creditworthiness, the repayment option you select, the term and amount of the loan and other factors, and will be within the ranges of rates listed above. The SoFi 0.25% autopay interest rate reduction requires you to agree to make monthly principal and interest payments by an automatic monthly deduction from a savings or checking account. The benefit will discontinue and be lost for periods in which you do not pay by automatic deduction from a savings or checking account. Information current as of 11/04/2020. Enrolling in autopay is not required to receive a loan from SoFi. SoFi Lending Corp., licensed by the Department of Business Oversight under the California Financing Law License No. 6054612. NMLS #1121636 (www.nmlsconsumeraccess.org).
6 Important Disclosures for Discover.
Lowest APRs shown for Discover Student Loans are available for the most creditworthy applicants for undergraduate loans, and include an interest-only repayment discount and a 0.25% interest rate reduction while enrolled in automatic payments.
7 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
Undergraduate Rate Disclosure: Variable interest rates range from 1.21% – 11.53% (1.21% – 11.53% APR). Fixed interest rates range from 3.99% – 11.80% (3.99% – 10.92% APR).
Graduate Rate Disclosure: Variable interest rates range from 1.39% – 11.43% (1.39% – 11.14% APR). Fixed interest rates range from 4.39% – 11.70% (4.39%-11.39% APR).
Business/Law Rate Disclosure: Variable interest rates range from 1.39% – 8.37% (1.39% – 8.07% APR). Fixed interest rates range from 4.13% – 9.84% (4.13% – 9.12% APR).
Medical/Dental Rate Disclosure: Variable interest rates range from 1.39% – 8.37% (1.39% – 8.07% APR). Fixed interest rates range from 4.03% – 8.64% (4.03% – 8.34% APR).
Parent Loan Rate Disclosure: Variable interest rates range from 2.13% – 7.44% (2.13%-7.44% APR). Fixed interest rates range from 4.69% – 7.83% (4.69% – 7.83% APR).
Bar Study Rate Disclosure: Variable interest rates range from 4.49% – 9.63% (4.49% – 9.56% APR). Fixed interest rates range from 7.39% – 12.94% (7.39% – 12.82% APR).
Medical Residency Rate Disclosure: Variable interest rates range from 3.58% – 7.08% (3.58% – 6.80% APR). Fixed interest rates range from 6.99% – 10.49% (6.97% – 10.08% APR).
Variable Rate Disclosure: Variable Rates are 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
Fixed Rate Disclosure: Fixed rate ranges are based on applicable terms, level of degree, and presence of a co-signer.
Lowest Rate Disclosure: Lowest rates require a 5-year repayment term, immediate repayment, a graduate degree (where applicable), 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. Rates are subject to additional terms and conditions, and are subject to change at any time without notice. Such changes will only apply to applications taken after the effective date of change.
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. Borrowers should carefully review federal benefits, especially if they work in public service, are in the military, are considering possible loan forgiveness options, 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. 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 on our website 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.
Eligibility Criteria: Applicants must be a U.S. citizen, permanent resident, or eligible non-citizen with a creditworthy U.S. citizen or permanent resident co-signer. For applicants who have not attained the age of majority in their state of residence, a co-signer is required. Citizens Bank reserves the right to modify eligibility criteria at any time. Citizens Bank private student loans are subject to credit qualification, completion of a loan application/Promissory Note, verification of application information, and if applicable, self-certification form, school certification of the loan amount, and student’s enrollment at a Citizens Bank participating school.
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.
7 Important Disclosures for Ascent.
Ascent Student Loans are funded by Richland State Bank (RSB), Member FDIC. Loan products December not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions December apply. For Ascent Terms and Conditions please visit: www.AscentStudentLoans.com/Ts&Cs
Rates are effective as of 12/01/2020 and reflect an automatic payment discount of 0.25% on the lowest offered rate and a 2.00% discount on the highest offered rate. Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized bank account each month. For Ascent rates and repayment examples please visit: www.AscentStudentLoans.com/Rates
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