As your brilliantly clever child prepares for college many parents will want to do what they can to help, and nowhere is that help more needed than with the finances. Completing a college degree is an exorbitantly expensive path to choose these days, with tuition, accommodation, and living costs increasing year by year. Maybe you put a little pot of money away in anticipation; the chances are though that it won’t have grown as much as the costs have.
Luckily, whether the parent can assist or not, all students are entitled to apply for two federal Stafford loans, which although means evaluated do not rely on a credit check. This means that the student can obtain them in their own name and be responsible for all the repayments. You can even take a federal loan out yourself (federal PLUS) to help your child. Oftentimes though there is still a shortfall in the cost of obtaining an education, even when a student has taken advantage of grants, scholarships, parents and federal student loans. If there is a shortfall the words ‘private loans’ come into play.
Unless the student has established their own credit history through early financial planning for this moment, no lender is going to give them a private loan in their own right, without the endorsement of a responsible person. In most students cases the first person they are going to approach is a parent or relative. Although their ten year old sister may be willing to co-sign the loan, the bank will actually need someone with their own excellent credit history.
Previous to February 2010 it was possible for a young person under 21 to obtain a credit card in their own name, and have a chance of building a credit history. Due to so many card issuers targeting the young aggressively, this has now changed, and unless the young person is working and has their own income, obtaining a credit card also requires a co-signer now. This change will mean that potentially more students are going to need a private student loan endorsing than previously, as they will have had less chance of starting to establish their own credit history.
The pros and cons of co-signing a student loan need to be considered seriously. If you simply cannot afford to cover the repayments if your child goes into default then do not co-sign, as you are liable for the debt in such circumstances. Any collateral you put up as the guarantor could be threatened. Basically by endorsing any loan you become responsible for any unpaid payments, or even the whole amount of the loan, and are potentially a better prospect to recover funds from than the person who actually has the loan in their name.
Any negative reporting against the loan to the credit bureaus will show on your own credit report. It will also reduce your own ability to obtain a loan of your own, as your debt ratio will be increased. A student loan is never dischargeable so potentially you could be liable for the full debt until it is cleared. Many guarantors do actually end up paying the loan.
Of course if you have an excellent relationship with your child, and have educated them in good financial practice, they will understand the necessity of making all their loan payments on time. You should have instilled in them the basic rules that you repay what you borrow on the agreed terms, always maintain a good credit score, and never default on your debts. If your child has already shown that they are responsible in matters of money then co-signing a student loan for them will be of great help to them. It need not be a risky venture if you have trust in your child.
After the student has made consistent, timely repayments on the loan for 36 consecutive months most lenders will agree to taking your name off the loan documentation and leaving your child solely responsible; thus your own responsibilities regarding the loan do not necessarily stand for the full term of the loan. If you do co-sign a student loan you are undoubtedly helping your child to pursue their academic studies with less financial worry, and they will be so grateful that they’ll be obliged to look after you in your old age.
If on the other hand your child never understood the concept of a piggy bank, thinks of you as little more than their banker, and blows all their cash on the fast life style and impressing their friends, they may not be ready yet to assume responsibility for a loan. You would be better advised to stand clear and say no.
Whether you choose to co-sign a student loan has to be your own informed decision. The negatives can definitely outweigh the positives. Your decision should be based on your financial ability to pay if you have to, as after all that is what you are legally guaranteeing to do. Then, if you really trust the person you are co-signing for to honour their guarantee to you to be a responsible borrower, you will have the satisfaction of helping them achieve their goals.