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.
Need a student loan?Here are our top student loan lenders of 2018!
|1 Important Disclosures for CollegeAve.
College Ave Student Loans products are made available through either Firstrust Bank, member FDIC or Nationwide Bank, member FDIC. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
2 Important Disclosures for Discover.
3 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) or Turnstile Capital Management, LLC (TCM), which are not affiliated entities. Certain restrictions and limitations may apply. 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. All loan products may not be available in certain jurisdictions. Other terms and conditions apply. Ascent is a federally registered trademark of 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 applicants ability to supply the necessary information for submission.
* 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.
4 = Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
5 Important Disclosures for PNC.
PNC Bank is one of the nation’s largest education loan providers. For over 40 years, PNC has been committed to helping students and their families make possible the adventure of college.
6 Important Disclosures for SunTrust.
Before applying for a private student loan, SunTrust recommends comparing all financial aid alternatives including grants, scholarships, and both federal and private student loans. To view and compare the available features of SunTrust private student loans, visit https://www.suntrust.com/loans/student-loans/private.
Certain restrictions and limitations may apply. SunTrust Bank reserves the right to change or discontinue this loan program without notice. Availability of all loan programs is subject to approval under the SunTrust credit policy and other criteria and may not be available in certain jurisdictions.
SunTrust Bank, Member FDIC. ©2018 SunTrust Banks, Inc. SUNTRUST, the SunTrust logo and Custom Choice Loan are trademarks of SunTrust Banks, Inc. All rights reserved.
7 Important Disclosures for LendKey.
Additional terms and conditions apply. For more details see LendKey
8 Important Disclosures for CommonBond.
A government loan is made according to rules set by the U.S. Department of Education. Government loans have fixed interest rates, meaning that the interest rate on a government loan will never go up or down.
Government loans also permit borrowers in financial trouble to use certain options, such as income-based repayment, which may help some borrowers. Depending on the type of loan that you have, the government may discharge your loan if you die or become permanently disabled.
Depending on what type of government loan that you have, you may be eligible for loan forgiveness in exchange for performing certain types of public service. If you are an active-duty service member and you obtained your government loan before you were called to active duty, you are entitled to interest rate and repayment benefits for your loan.
A private student loan is not a government loan and is not regulated by the Department of Education. A private student loan is instead regulated like other consumer loans under both state and federal law and by the terms of the promissory note with your lender.
If your private student loan has a fixed interest rate, then that rate will never go up or down. If your private student loan has a variable interest rate, then that rate will vary depending on an index rate disclosed in your application. If the interest rate on the new private student loan is less than the interest rate on your government loans, your payments will be less if you refinance.
If you don’t pay a private student loan as agreed, the lender can refer your loan to a collection agency or sue you for the unpaid amount.
Remember also that like government loans, most private loans cannot be discharged if you file bankruptcy unless you can demonstrate that repayment of the loan would cause you an undue hardship. In most bankruptcy courts, proving undue hardship is very difficult for most borrowers.
9 Important Disclosures for Citizens Bank.
Citizens Bank Disclosures
|3.69% – 10.94%1||Undergraduate, Graduate, and Parents||Visit CollegeAve|
|3.99% – 12.99%2||Undergraduate and Graduate||Visit Discover|
|3.82% – 12.82%3||Undergraduate and Graduate||Visit Ascent|
|4.12% – 10.98%*,4||Undergraduate and Graduate||Visit SallieMae|
|5.03% – 11.23%5||Undergraduate and Graduate||Visit PNC|
|3.88% – 12.88%6||Undergraduate and Graduate||Visit SunTrust|
|4.68% – 9.77%7||Undergraduate and Graduate||Visit LendKey|
|3.72% – 9.68%8||Undergraduate, Graduate, and Parents||Visit CommonBond|
|4.04% – 12.01%9||Undergraduate, Graduate, and Parents||Visit Citizens|