As the cost of tuition continues to rise, many students struggle to pay for their education. Oftentimes, parents get involved in helping their kids pay for college in one of several ways, including by consigning their student loans.
Federal aid is a great option for students but, unfortunately, it often isn’t enough to cover the full cost of tuition. So, many students turn to private lenders, which often require a co-signer like a parent to reduce the risk of the loan. Many parents do end up cosigning on these loans for their children.
What Is a Cosigner?
It can be hard for borrowers with limited credit history to qualify for a private student loan on their own. Private loan eligibility requirements can be relatively strict for a young college student which is why a cosigner can be beneficial. A cosigner is someone who agrees to pay a borrower’s debt if that person defaults on his/her loan. Often the lender is making an approval based upon the cosigner, not the borrower.
Typically, a cosigner has good credit history and high credit score, so they greatly improve a borrower’s chance of being approved for the loan. Plus, the borrower will likely receive a lower interest rate than they would if they had been approved on his/her own.
There’s no doubt that parents can help their children greatly by cosigning on student loans. However, they need to understand that there are risks involved with this responsibility.
Many parents have faith that if they cosign on a loan, their children will repay them once they graduate and get a job, but that’s not always the case. If your child can’t repay the loan, you’re required to pay that debt, or you will be held in default and your credit standing could suffer.
Should a Parent Readily Cosign a Student Loan?
Borrowers are increasingly defaulting on their student loans. The three-year default rate on student loans rose from 11.3% in September 2015 to 11.5% a year later, according to U.S. Department of Education statistics reported by Washington Post.
If your child begins missing payments on their loan, this will damage your credit as well as theirs. And if they stop paying the loan altogether, you become responsible for that debt.
The number of consumers over the age of 60 that owe student loan debt has quadrupled over the last decade, according to the Consumer Financial Protection Bureau. This is largely attributed to the number of parents that cosigned or took out loans to finance their child’s college.
However, that does not mean you should never consider cosigning on student loans for your child. It just means you should make such you understand the terms of the loan.
If you do want to cosign a loan for your child, choose a loan that offers a cosigner release option. That way, your child gets the benefit of your good credit score, but you can eventually be released from the financial obligation.
Keep in mind that students are much more likely to repay their loans if they graduate with their degree. So never cosign on a loan unless you’re confident that your child has a plan and is committed to graduating.
To better protect yourself, make sure your child understands the financial obligations of taking out the loan. Calculate the monthly payments with interest so you’ll know whether your child can realistically repay that loan.
The Bottom Line
Student loans can be burdensome, but college degrees often pay off through a more lucrative career. As a parent, you want to help your child succeed, but you should still use caution when you cosign and be wary of student loan default.
Make sure you understand what you’re getting yourself into and that you’re realistic about your child’s ability to repay his/her debt. Have a way to keep track of the loan and ensure that the payments are being made. After all, if your child falls behind on the payments but doesn’t tell you, your credit score can be negatively affected.
By Andrew from LendEDU – a consumer education websites and financial product marketplace. Andrew has been writing about personal finance for the last several years as he pays down student loan debt of his own.