In most circumstances, college students can get federal student loans without the need for a cosigner; nevertheless, there are rare instances when a cosigner is necessary. Federal Direct Parent PLUS loans, for example, can be obtained on behalf of dependents to assist them pay for higher education. Students can also qualify for private student loans to help pay for education. These loans typically have high credit criteria, making it difficult for young individuals to qualify on their own.
But should you actually cosign a college debt for your child? Should you cosign any debts that they cannot qualify for on their own? You may absolutely think about it, but it’s best to go into the scenario with your eyes wide open and comprehend all of the advantages and disadvantages.
The primary benefit of cosigning is that you are assisting your child (or dependant) in paying for higher education when they would otherwise be unable to do so. However, it can also pose a significant risk. Here’s everything you should know before signing on the dotted line.
You are compelled to repay the obligation regardless of what
Whether you take out a Parent PLUS loan or cosign with your child on a private student loan, the first thing you must realize is that you are obliged to repay the amount. If your child stops paying payments, you will have to make them. If your child refuses to work and fails to meet their obligations, you will be required to return the debt.
Cosigning on a student loan is comparable to cosigning on a mortgage or a vehicle loan. You are both equally accountable for repayment, regardless of what the other person does. That can be a major problem if your child does not take their payments seriously, but it may not be an issue if they manage their credit carefully and remain on top of their obligations.
Student loans are nearly never dischargeable in bankruptcy.
Another important point to realize is that student debts are seldom erased in bankruptcy. For the most part, they’ll be around indefinitely until the borrower dies or you can demonstrate an unavoidable hardship.
As a parent, you’re certainly attempting to prepare for retirement and achieve other financial objectives, so it’s crucial to remember that the student loans you cosign for will never be discharged unless you pay them off completely.
There is no going back.
When you cosign on a student loan, you cannot just back out of the agreement. Your kid may be able to refinance their student loans in their name, but only if their credit score is high enough to qualify for student loan refinancing on their own terms. And if that were the case, they would not have required a cosigner in the first place.
Your finances may be good right now, but think about how they will be in five or ten years. If you’re reaching retirement age, you might not want to put yourself in the position of having to pay off your child’s college loans. Furthermore, you never know how your health will be or the state of your work many years from now. Cosigning for student loans locks you in regardless of what happens, and it’s difficult to alter your mind later.
Cosigning on a loan may influence your credit score.
When you cosign on a student loan, you agree to share responsibility for the debt and any repercussions that result from late payments or delinquencies. So, you should only cosign if you are confident that your kid or dependant will pay their expenses on time and avoid default at all costs.
If you don’t pay attention, you might quickly lower your credit score without realizing it. Given that payment history accounts for 35% of your FICO score, it’s simple to understand how a single late payment might have serious consequences. Consider what would happen if you cosigned for student loans that were not paid on time month after month. If you do not get a bill in the mail, you may not be aware of the harm until it is too late.
In Conclusion
Cosigning on a student loan may make sense in certain cases, but this choice should never be done carelessly. You may be helping your child achieve a degree, but you are also taking a major risk. (See also: Should You Co-Sign on a Loan?)
Before you cosign, you should consider the job field they intend to pursue and how much they expect to make after graduation. Some industries have a lot of potential right now, while others have absolutely none, and you should recognize the difference before making any financial commitments. Perhaps your college student should spend time boosting their credit score so that they can apply for student loans on their own.
Cosigning on student loans should be a last choice for parents, not a quick fix for students who don’t take the time to weigh their alternatives.
