Let’s face it, college is expensive. With the average student loan balance at $35,000 and the total outstanding balance is $1.3 trillion, families are having to get creative with how they pay for college. Nearly every graduate will need to borrow money at some point in their college career. To secure the lowest interest rates, they may need their parents to cosign student loans. While every parent wants to see their child succeed, should they also act as a cosigner for their child’s education?
Advantages of Parents Cosigning Student Loans
There are several benefits to cosigning student loans. It might be the only way to qualify to borrow the necessary funds to pay college tuition, like an auto loan or home mortgage with minimal credit history. Cosigning also allows you to (potentially) qualify for the lowest interest rates, because your credit score should be higher than their score.
As a parent, your financial goal might have been saving for college and cosigning allows you to fulfill the funding gap of your child’s education.
Regarding your credit score, it will most likely improve after the initial loan application dip if all the payments are made on time.
Disadvantages of Cosigning
If you cosign a student loan and your child (the borrower) stops making payments, the bank will require you to make the payments instead. If you don’t your credit score is damaged as well as his. Whether you cosign for a financially responsible child or a spendthrift, there is always the risk that you will be financially responsible for making the monthly payment.
If your child isn’t financially responsible it might be in your best interest to not cosign their student loan if you cannot afford to make the payments if they stop making payments.
When Parents Need to Cosign Student Loans
While you might think that a college student cannot qualify for a student loan on their own merit since most 18-year olds lack a credit history and steady income, they don’t always need a cosigner for their student loans.
Federal Student Loans
Federal student loans do not require a cosigner. This is great news if, as a parent, you have damaged credit or a high debt-to-income ratio at the moment. To qualify for Federal Stafford or Perkins loans, you will need to apply for the FAFSA (Free Application for Federal Student Aid) each academic year.
Once all loans enter repayment status, the borrower is solely responsible for making the payment. If they cannot afford the payments, there are income-based repayment and loan forgiveness options available.
Private Student Loans
Private student loans are more likely to require a cosigner. In fact, approximately 90% of private student loans have a cosigner. Especially if you want the lowest interest rate. While federal student loans often have lower interest rates (3.76% for the 2016-17 academic year) than most private loans, you can only borrow up to $7,500 in Federal Stafford loans each academic year, it’s highly likely you will need private loans to supplement.
To get the lowest interest rate, a parent must cosign the student loan application, otherwise, their child could be paying close to 10% in interest. Also, some private lenders will only accept student loan applications with a cosigner.
Refinanced Student Loans
The third and final option is refinanced student loans. This is after your child has graduated from college and either needs more than the standard 10-year repayment period to repay the balance or wants to renegotiate a lower interest rate.
Depending on their credit history, the lender might once again require a cosigner. As the cosigner, you are just as responsible for making the payments as with the original private student loans.
Should A Parent Cosign for Student Loans?
Whether or not a parent should cosign their child’s student loans ultimately depends on two variables: their personal relationship & the parent’s financial shape. If the parent is just as likely to miss the loan payments as their child, it’s probably not a good idea to cosign.
A parent isn’t required to cosign any loan, although, it is an extremely kind gesture. If the parent isn’t willing to cosign, the student has to find another person willing to cosign or find an alternate way to pay for college like federal loans, grants and scholarships, or even a family loan.
For most parents with sound finances and responsible children, cosigning is often a wise financial decision to help their child earn a degree and shape their financial future.