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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|* 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.
(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.
2 Sallie Mae Disclaimer: Click here for important information. Terms, conditions and limitations apply.
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 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 of December 1, 2019, the one-month LIBOR rate is 1.70%. Variable interest rates range from 2.80% – 11.06% (2.80% – 10.91% 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 Bank 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.
Please Note: International Students are not eligible for the multi-year approval feature.
|2.84% – 10.97%1||Undergraduate, Graduate, and Parents|
|2.87% – 10.75%*,2||Undergraduate and Graduate|
|2.80% – 11.37%3||Undergraduate and Graduate|
|3.52% – 9.50%4||Undergraduate and Graduate|
|2.80% – 11.06%5||Undergraduate and Graduate|