College is expensive, and many students take out loans when grants, scholarships and savings arent enough. While federal student loans generally dont require a credit check or a co-signer, the amount students can borrow is limited. Students often cant obtain a private loan themselves because they dont have an established credit history. In that situation, they may ask a parent to co-sign.
Pros and Cons of Co-signing
Co-signing a loan could help your child earn a degree, find a lucrative job after graduation and start down the road to financial independence. If you have good credit, co-signing a private student loan could help your child get a good interest rate and manageable payments.
If you co-signed a loan, your child would be the primary borrower, but youd be financially responsible if your child failed to make payments on time. Student loans are often for large sums of money. Think about whether youd be able to pay back the loan if your child couldnt get a job or didnt handle money responsibly after graduation.
If your child missed a payment or paid late, the lender might not notify you promptly, and you might be unaware of the problem until your credit score dropped. If you decide to co-sign a loan, make sure youll be able to access your childs account to check that payments are up to date.
Even if your child made payments on time, the student loan would show up on your credit report and would affect your debt-to-income (DTI) ratio. A high DTI ratio, plus a possible drop in your credit score, could make it difficult to qualify for a loan or credit card of your own or to get a competitive interest rate.
Lenders will sometimes release a co-signer from responsibility for a student loan after a borrower has consistently made payments on time. Lenders have strict requirements, however, and most applications are rejected. If your child built up solid credit and had a high enough income, it might be possible to refinance the loan to remove your name from it.
Is Co-signing a Student Loan a Good Idea?
Think about your childs personality and commitment to pursuing a higher education, as well as your family dynamics. If your child is excited about college and you expect him or her to focus, work hard, graduate and find a job quickly, you might feel comfortable co-signing a loan. If, on the other hand, your child isnt particularly interested in college or isnt financially responsible, co-signing could be a mistake.
Even if your child had every intention of repaying the loan, a financial hardship could make that impossible. That means you would be stuck with the payments. Think about how that could affect your finances, your relationship with your child, and your and your childs relationships with other family members who would be impacted. Before you agree to co-sign a student loan, consider the potential ramifications and explore alternative sources of funding.
Published with permission from RISMedia.