Pros and Cons of Cosigning a Student Loan.
You have saved money for your child’s college education, but the cost of tuition, fees, room and board has gone up so much that you are short on funds. You have two student loan alternatives:
- Parent Plus loan: Parent Plus loans are federal student loans that are designed to supplement federal aid and federal student loans available directly to the student. In order to be approved for a Parent Plus loan, you will need a satisfactory credit score. You can add a cosigner, if your loan application is not approved. You will have full financial responsibility for the loan. The student is not required to sign for the loan. However, make sure that the student has availed taken advantage of all available financial aid, scholarships and federal funding, before you take the Parent Plus loan.
- Private Student Loans: These are student loans offered by private lenders. A minimum income, credit history and/or debt-to-income ratio are required for you to qualify for a private student loan. In almost all circumstances, a cosigner is required in order for a student to get a private student loan. Even in cases when one is not required, a cosigner usually creates the opportunity for lower interest rates.
Cosigning a Student Loan
Although a student loan cosigner is generally a parent, lenders will accept other parties as cosigners, including spouse, relatives (uncles, aunts, grandparents, cousins), and friends. Lenders look for strong credit history, satisfactory debt-to-income ratio, and stable employment and residence history.
Cosigning a private student loan can make the difference in covering all the costs needed to send a student to college. However, cosigning has its dangers. Be informed!
Advantages of Cosigning a Student Loan
Cosigning is generally a necessity for a student to obtain a private student loan. Students are generally not eligible for a private student loan on their own, due to weak income and credit history. Even if eligible, the student will receive less favorable terms than a cosigner with an established credit and income history. Therefore, as a cosigner you can expect to receive these benefits:
- Loan approval
- Better terms, lower interest rates
- Chance to build student’s credit history
Disadvantages of Cosigning a Student Loan
Cosigning a student loan brings full responsibility to the cosigner. Cosigning creates a long-term contractual relationship between the lender and the borrowers. Each borrower is independently responsible for the loan, so do not assume that the other party will pay for the loan. If the loan is not paid as agreed, the lender will try to aggressively collect from the borrower with the strongest financial capabilities and assets. Student loans are generally not dischargeable in a bankruptcy. It cannot be repeated enough times: The cosigner is fully responsible for the entire loan.
Most lenders allow for the release of the cosigner, if basic requirements are fulfilled, including the following:
- On time payments: Some lenders, like Sallie Mae, require 12 consecutive principal and interest payments, after the student has completed school, as per the Sallie Mae Smart Option loan. Sallie Mae requires 24 consecutive principal and interest payments on all other loans. Wells Fargo requires that the student make all of the first 24 consecutive monthly payments on time. Citizen Bank offers a TruFit Student Loan, which allows for the release of cosigners after a period of 36 consecutive on-time payments.
- Contractual requirements: Read the fine print. All the lenders require the remaining borrower (the student) to meet all the underwriting requirements, at the time of the release. That means that the student will have to build up their credit score, have satisfactory income, an acceptable debt-to-income ratio, and meet age and citizenship requirements.
Read and know your rights as a cosigner. Don’t bank on being released from the loan. Be prepared to be a cosigner on a private student loan for the entire length of the loan.
Tips for Taking and Cosigning a Parent Student Loan
Although it is not necessarily the cheapest source of money, private student loans can be an important source of unsecured financing for college and university education.
Before cosigning private student loans, take these important steps:
- Prepare a budget for financing college and university studies.
- Before looking for a private student loan, utilize all other sources, including free aid, scholarships, savings, current income, federal student loan, and federal Parent Plus Direct Loans.
- Plan the federal Parent Plus loan into your monthly budget.
- Before cosigning a private student loan, go over the payment schedules with the student. Evaluate the necessity of deferring payments. Deferment will create a greater balance at the end of the school period.
- Explain to the student your expectations: how much you can afford and how much you expect the student to pay.
- Cosign only for those amounts that you can afford to repay, either through assets or income.
- To increase your chances that the lender will release you as a cosigner, be proactive. Make sure that the required payments are made on time.
- Remember, you are liable for the whole loan, for the entire period of the loan.