In most cases, college students are able to get federal student loans on their own without the need for a cosigner. However, in some instances a cosigner may be required. Federal Direct Parent PLUS loans can be taken out by dependents in order to pay for their higher education. To pay for college, students can apply for student loans. The credit requirements for these loans are high, making it hard for students to qualify.
Should you co-sign student loans for your children? Should you cosign for or any loan that your child cannot qualify for? It’s something you can consider, but make sure to weigh all of the pros and cons.
Cosigning has the main benefit of helping your child or dependent pay for higher education, when they might not otherwise be able. It can be a big risk. Here’s what you need to consider before you sign the contract.
No matter what, you’re still obligated by law to pay back the debt
You’re responsible for repaying the debt, regardless of whether you sign up for a Parent PLUS Loan or cosign with your student. You will be responsible for making the payments if your student stops paying. You will be responsible for repaying the loan if your child refuses to work and defaults on all their obligations.
The cosigning of a student loan can be compared to buying a home with someone else or cosigning a loan for a vehicle. Both of you are jointly responsible for repayment, regardless of the other person’s actions. It can be a big problem if you don’t treat your child’s bills seriously. But it might not be a problem if they take care of their credit and keep up with their bills.
In bankruptcy, student loans are rarely discharged
It is important to know that student loans will rarely be discharged during bankruptcy. They’ll stay with you forever, unless you prove that you are facing an inescapable hardship or the borrower has died.
You may be a parent trying to reach financial goals such as saving for retirement. It’s therefore important to know that student loans, which you cosigned for, will not disappear until they are paid off.
It’s impossible to go back
You can’t back out of a cosigner agreement for a student loan. If your child’s credit score is high enough, they may be able refinance student loans on their behalf. If that were the case, then they would not have needed a creditor in the first place.
You may think that your finances are fine now, but it’s important to consider how they will be in 5 or 10 years. You may not want to be in a position where you have to pay off student loans for your child if you are nearing retirement. You never know what your future health or career will be like in a few years. You are on the hook for any student loan you cosign. It’s difficult to change this after the fact.
Your credit score could be affected by cosigning a loan
You should only cosign if you know that your child or dependent is committed to paying their bills on time and avoiding default at all costs. You should only sign if you are confident that your child will pay their bills on-time , and avoid default at any cost.
You could be unaware of a major hit to your score if you don’t pay attention. Payment history accounts for 35 percent of the FICO score. It’s easy to understand how one late payment can cause serious damage. Imagine what would happen if you were to continue paying your student loans late, month after month. You may not know about the problem until it’s too late if you don’t receive a bill.
Bottom line
Cosigning a student loan can be a good idea in certain situations, but it is not advisable to do so lightly. While you may be helping to earn your child’s degree, you are also taking on a risk.
Before you sign, it’s a good idea to find out what they will earn after graduation and the field that they are planning to enter. You should be aware that some fields are promising, while others have little to no promise. This is important before you commit any money. You could help your student improve their credit score to qualify for student loan on their own.
Parents should only cosign student loans as a last resort. It is not a quick fix for students that don’t have the time to think about all their options.
