The dream of going to college in the US may be impossible for some students without the use of student loans. This is true whether your child attends state college or a private school. Today, 7 out of 10 college graduates are graduating with some form of student loan debt. Each year, 1.4 million students use private student loans to pay for their education.
When your child comes to you and asks for you to cosign his loan, it shouldnâ€™t be a surprise. College students do not often have a credit history yet, and itâ€™s natural for them to turn to you so that they can get a loan, or to get a better interest rate.
Before you cosign a student loan for your child or a friend, think about what youâ€™re putting at risk.
Cosigning is Risky
When you cosign for a student loan, you are assuming joint responsibility for the full amount of your childâ€™s student loan debt. Even if you never see any money yourself, you are fully responsible if your child canâ€™t pay the debt.
Student loans are treated differently than any other types of loans, which brings on more inherent risk. They cannot be discharged if you or your child declares bankruptcy. Lenders for student loans can garnish even your social security checks. This puts your retirement at risk.
Lenders now use private debt collectors for unpaid student loans. They will use public records to find you and they often use aggressive collection methods. Student loans never become void, either. Debt collectors can indefinitely pursue you for student loans that have not yet been repaid.
You canâ€™t just remove yourself from a Student Loan
Donâ€™t agree to the cosigning of a student loan expecting that you can remove your name later on. Some lenders do offer a release for cosigners, but there are hoops to be jumped through in that event. Many lenders demand consecutive payments that are always on-time before cosigners can be released. The period may be as low as Sallie Maeâ€™s 12 months or as high as SunTrustâ€™s 48 months. Even after timely payments, there isnâ€™t a guarantee that the lender will allow you out of your cosigning commitment.
Your Credit could be damaged
If you have excellent credit now, taking out a student loan may make it more difficult for you get open credit cards or open other loans. If you anticipate a major purchase in the future, like a new home or car, you may be better off not cosigning right now. In addition, if your child fails to make any payments on time, your credit score could fall. Even one missed payment can affect your credit score negatively.
Consider these Issues before You Cosign
What if your child cannot pay? He or She may have the best intentions, but if he or she cannot get a job that pays enough to pay back the loans, they fall to you. What major is your child planning to pursue? Will he or she be able to get a well-paying job when they graduate?
On a much more serious side, if your child is disabled and canâ€™t work, or passes away, you will be left with their student loans, in addition to the sorrow.
Itâ€™s noble to want to help your child. However, you cannot get loans to pay your way through retirement. Watch out for your future as well as your childâ€™s. Significant money should be going into your savings for retirement.
The Obligation May be Larger than the Financed Amount
The amount your child borrows is not the amount you will pay over the loan life. Interest, deferment and forbearance may add to the cost. If you become the responsible payer, any accrued fees and interest will be included in the amount you owe.
Your Relationship May be Hurt
Students default on over six percent of private student loans, according to 2013 statistics. This may mean that payments are delinquent or unpaid. If you cosign for your child on a student loan, be prepared to assume the debt if he canâ€™t make the payments. If you are not able to make the payments either, at that time, this can cause serious difficulties. Your credit will suffer, of course, but so can your relationship with your child. Money can pull families apart. Think carefully before you cosign loans that you may not be able to repay, whenever they might go into default.
Safeguard your Credit
Be sure that your child exhausts all options for financial aid, including scholarships, grants and federal student loans before you even consider cosigning on a private student loan. There are a number of options available for students looking for loans without a cosigner.
Only borrow the amount he absolutely needs. Donâ€™t take out more than one year of the anticipated salary upon your childâ€™s graduation. If you do your research and expect that your child will earn about $40,000 a year in a position under his major, donâ€™t borrow more than that in student loans.
Have your child sign an agreement that says he will repay you for any fees and missed payments that you may pay over the loan life. This way, you can recoup at least some of your losses if you have to go to court.
Take control of the repayment of student loans. If your child misses a payment, the creditor may take months to inform you of this fact. By that time, your credit score may already be damaged. Submit payments yourself online electronically, or mail them yourself. Automatic payments are often available and lenders may offer incentives for them.
Before you agree to cosign a loan, understand all these implications. Speak with your child about this decision. Students may not fully understand the burden of debt assumed in college, and the decision needs to be made by the family, not the student.