If your teen is heading off to college in the fall, there’s a good chance you’re thinking about how you can help them cover some of the costs. From tuition and books to gas money and extra cash for their cell phone bill (you do want them to keep in touch, right?), your child is going to need a lot of money over the next four years.
One option you may be considering is cosigning a student loan. If this is your first time partnering up with your child on a financial transaction, you probably have some questions and concerns — and rightfully so.
Let’s take a look at what it means to cosign a student loan with your college student, and discuss some of the pros and cons that come with this decision.
What does it mean to cosign a loan with your college student?
When you offer to cosign a loan, you are agreeing to share the responsibility of paying off the debt associated with that student loan.
Your child is the primary borrower on the loan, but you agree to take on all payment obligations associated with the student loan if your child is unable to fulfill their commitment.
In other words, if your child defaults or cannot pay for any reason, you get stuck with the bill.
Does your child need a cosigner for student loans?
The short answer: most likely. If your child is applying for a private student loan, there's a good chance they are going to need your help.
Unless your teen has an established credit history of their own (most kids don't), they will need a cosigner with a solid credit history to partner up with. Which means, you may be asked to sign on the dotted line for your child’s private student loan.
What student loans are available without a cosigner?
Most federal loans do not require a cosigner. For example, the Perkins Loans and Direct Subsidized and Unsubsidized Loans (Stafford Loans), do not require a credit check or a cosigner.
If you (and your child) qualify for federal financial aid, these loans should be your first choice before looking at private student loans. Federal loans often have lower interest rates than private loans. So your best strategy is to max out "free money" from grants and scholarships, then turn to federal student loans, and use private loans to fill in tuition gaps.
Pros of cosigning a student loan
If your child does not have enough money in federal financial aid to cover the cost of college, they may need to look at private student loans.
Despite what you may have heard, there are some pros to helping them with this financial commitment.
The obvious pro of cosigning a loan is being able to help your teen with this next phase of their life. Private loans allow you (and your child) to fill the financial gap that federal financial aid, grants, or scholarships did not meet.
Depending on your credit score, there’s a good chance cosigning on a student loan will help your teen get a lower interest rate. That’s good news since a lower interest rate can help make the monthly payments more manageable.
If you’re concerned about being attached to this debt for the next 10 to 20 years, take some time to research different lenders. Some are willing to release you as the cosigner if your child demonstrates responsible repayment.
Cons of cosigning a student loan
The most obvious con of cosigning on a student loan happens if your child misses a payment or stops paying on their student loan. If your child is late on payments or missing them altogether, this can have an impact on your credit score.
One other factor for you to consider is how cosigning could impact your ability to apply for other types of loans or credit. If you have plans to take out any major loans, you may want to talk with a financial expert about your particular situation.
Finally, you need to consider your relationship with your child. While you can’t predict the future, it’s worth your time to think through your response if they default on the loan. This will help ensure that you enter into this process with your eyes wide open.
If you do decide to help your child by cosigning a student loan, check out our report on What is a Private Student Loan: Student Loan Requirements.