So, You Want to Cosign Your Child's College Student Loan
, by Rob Kaufman
Before signing on the dotted line, there are a few things about student loans you may want to consider...
College is expensive. That's a given. What's not a given is how your child is supposed to pay for his or her college education. Unless there's a giant tuition trust fund waiting in the wings, what financial options are available? The most viable option is something that's been getting a lot of attention lately - student loans.
There are a multitude of different student loans available today. However, they all have one thing in common: the person signing for the loan must satisfy specific credit underwriting criteria. Unfortunately, students just graduating from high school have a very lean credit history, if they have a history at all. Therefore, if they're going to apply for a loan, they'll most likely need a creditworthy cosigner. And who better than mom or dad to sign on the dotted line?
Cosigning risks
Oftentimes, in the excitement and turmoil of a child going to college, parents don't take into account the potential risks of cosigning a college loan. Other than the debt that will be accumulated, some of the other risks include:
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Credit history damage. The borrower and cosigner are both responsible for repayment. So if the borrower pays late or defaults, the credit history of both parties will take the hit.
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Credit denial. If the cosigner wants to apply for a new loan or refinance an existing loan, the lender will evaluate his or her credit report. When the student loan appears, the cosigner might get denied or have to pay higher interest rates due to the increased risk of the cosigner's ability to repay so much debt.
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Hidden loans. It's imperative for the cosigner to read the promissory note carefully in order to ensure it doesn't authorize any loan other than the current student loan. Sometimes these agreements are obligating the cosigner to pay for all subsequent loans for the same period of enrollment. Take the time to read all of the terms.
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Bankruptcy won't help. A cosigner is still obligated to pay even if they declare bankruptcy. The same holds true for the borrower. Bankruptcy will not get either person off the hook for repayment.
A word about federal student loans
In general, federal loans don't require a cosigner. These federal loans include Direct Subsidized and Unsubsidized Loans, Perkins Loans and Direct Consolidation Loans. This "non-requirement" of a cosigner applies even if the student is underage.
Plus, as long as the borrower (student) has a problem-free credit history, a cosigner is not required for a Grad PLUS Loan or Parent PLUS loan.
Cosigner Release
If a lender provides the option for a cosigner to be "released" from the agreement, there will be certain criteria that have to be met before the actual release occurs. For example, the borrower must make a pre-arranged number of consecutive on-time payments before the due date. The borrower must also have a steady job with enough income to repay the debt, meet specific debt-to-income ratios and show satisfactory payment on their other credit obligations.
In order to increase the possibility of a cosigner release, it's best to:
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Submit all payments in the name of the borrower and not the cosigner
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Ensure the borrower has income, debt-to-income ratios and debt-to-service ratios that show he or she can continue to make the loan payments
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Make all payments in full and on time. One delinquency can ruin the chances of a cosigner release.
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Achieve a very high credit score for the borrower.
Lastly, there's always the refinancing option. Once the borrower has established a strong credit history and income stream, they can apply to refinance the loan in their own name only. Again, specific criteria will have to be met, but it's a great option that, if successful, releases the cosigner of any responsibility while giving the borrower a sense of freedom and a feeling of pride that they are now able to pay off the loan by themselves.
Many people visit myFICO Forums to read and share important information about student loans. For instance, this member wants to know about getting a mortgage while still paying off a student loan . And now we have a new Student Loans Board specifically for people interested in learning more about rapidly changing world of student lending.
Rob is a writer... of blogs, books and business. His financial investment experience combined with a long background in marketing credit protection services provides a source of information that helps fill the gaps on one's journey toward financial well-being. His goal is simple: The more people he can help, the better.