Paying for college isn’t easy. The typical cost for a single year of schooling at a public college was $9,650 for the 2016-2017 school year. Since most can’t afford this steep cost out-of-pocket, many students turn to federal aid, scholarships, and federal loans. But it’s not always enough. Sometimes they need private student loans to help cover the gap. However, many don’t have the credit to qualify on their own.
Since private student loans take factors such as income, assets, and proof of a stable job into consideration, many young students may not be eligible on their own. This means they won’t be able to get student loans without a cosigner. Often that burden falls on the parent.
While you may be eager to help finance your child’s education, there are some things to consider before cosigning their student loan.
1. You’re on the hook if they don’t pay
It might seem pretty innocuous signing your name on loan for your child, but it can have some serious consequences for you if they don’t pay.
“A cosigner is a co-borrower, equally obligated to repay the debt,” said Mark Kantrowitz, publisher of PrivateStudentLoans.guru. “Cosigning a loan does a lot more than enabling the primary borrower to obtain the loan; the cosigner is obligated to repay the debt. As soon as the student is late with a payment, the lender will start seeking repayment from the cosigner.”
Not only will the lender seek missed payments, but technically, cosigning a loan means you are required to pay all of it back if the borrower can’t. What’s more, you might not even be aware payments were missed and would only find out when someone checks your credit score.
2. Cosigning a student loan could hurt your credit
Since you are on the hook for payments and a partner in taking on this debt, the loan will show up on your credit report as well. If your child’s loan payments are not repaid on-time and in full, it could have a negative effect on your credit score.
“If the student is late with a payment or defaults, it will ruin the credit scores of both the student and consigner,” said Kantrowitz. “The cosigned loan will count as indebtedness of the cosigner when the cosigner seeks to get new credit.”
Mark Billion of Bankruptcy Anywhere said, “If your credit score isn’t the best and you can’t afford to risk it taking a dip, you make want to reconsider becoming a cosigner. You probably shouldn’t do it if your child is likely to default. Also, depending on how the loan is structured, just taking out the loan could negatively impact your credit.”
3. Cosigning might hurt your other financial goals
Not only will you lose money if you are stuck paying back the loan, but you may also have problems getting loans when you need them most. You might have a tougher time qualifying for an auto loan or refinancing a mortgage because your debt-to-income ratio (DTI) is impacted.
“Cosigning your child’s student loan will count towards your debt-to-income ratio,” said Billion. “This is something lenders will consider and cosigning could prevent you from getting the loan you want in the future.”
So if you’re going to be pursuing a mortgage or some other kind of loan in the near future, you may not want to cosign as it may affect your chances of securing a loan of your own. Even if you do qualify for the loan, your DTI could increase your interest rates because the banks consider you a higher risk loanee.
4. Bankruptcy doesn’t help if you can’t pay
Both you and your child are stuck not being able to pay the loan and might consider filing for bankruptcy as a last resort. Unfortunately, that won’t help your student loan situation because student loans are very difficult to discharge in bankruptcy, whether you are the parent or the child who took them out.
The only way to get a student loan discharged in a bankruptcy case is to prove to the court that repaying it would cause excessive hardship. You have to meet the stipulations of the Brunner test to qualify, which include poverty, persistence (where your financial situation isn’t likely to change), and good faith (you’ve tried to pay the loans).
“You can almost never get rid of [student loans],” said Billion. “And if you (or your child) defaults, you may see your Social Security and other benefits garnished. You are almost certain to lose your tax refunds.”
Not to mention, filing for bankruptcy hurts your credit, and you could end up paying court fees along the way.
5. Cosigning a student loan could strain your relationship
Of course, there are all of the negative financial implications for cosigning your child’s student loan. But there’s also the emotional aspect of it. You could be putting your relationship with your kin at risk if the repayment doesn’t go as intended.
Mixing family with finances could potentially damage a relationship if something goes wrong. “The other factor to consider is that by taking out the loan, you are potentially jeopardizing the chance to help your child in the future because you may not have available credit to cosign for houses and cars down the road,” said Billion.
Ask yourself, is this worth a risk of this significance? If your child can’t get student loans without a cosigner, it could damage the relationship in its own right. But these are all factors that need to be considered when making such an impactful decision.
If you’re not feeling comfortable cosigning your child’s loans, don’t worry because there are plenty of other options. Check out this article about ways parents can help pay for college and avoid financial ruin.
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