At last count, a four-year degree at an in-state public university will set you back a little more than $9,000 a year on average. That’s just tuition. Add room and board, books, transportation, pizza, and those other costs quickly add up. And while you may have some money stashed for this purpose and federal student loans can help, even combined sometimes they aren’t enough.
Private student loans can bridge the gap, but without a credit history, it’s difficult for students to get approved on their own. That’s where cosigners come in. “More than 90% of private student loans to undergraduates require a credit-worthy cosigner,” says Mark Kantrowitz, publisher and VP of research at SavingForCollege.com “To the lender, the student is an unproven asset.”
Of course, as a parent, you want to help your child succeed. But before you sign on the dotted line, make sure you and your child understand the financial commitment. Below, we’ve read between the lines so you don’t have to.
You’re equally obligated to repay the debt
A big misnomer when it comes to cosigning student loans– is that the borrower is solely responsible for the debt. If the student doesn’t pay it back, it’s only their credit that suffers. The reality is quite the opposite. “Most people think they’re giving a reference, but if you are cosigning a student loan or a mortgage it is you who is borrowing that money,” says Kantrowitz. If your child can’t pay it back you’re on the hook.
Have the talk with your child
If your child can’t pay it back, you’ll be held responsible to pay it back and make sure he or she understands this. It’s important to gauge your child’s ability to repay before signing on the dotted line. Look at how they’ve handled their finances, part-time jobs, chores, and schoolwork to ascertain their likelihood of paying on time. You don’t want to cosign a loan if your child won’t treat the debt seriously.
If there’s any doubt your child will repay the debt, you may want to consider taking out a parent loan in your name. A parent loan, such as the one from College Ave, can give you more control and protect your credit score from any dings from late or missed payments. With the College Ave loan, you also have the option to get up to $2,500 of the loan delivered straight to you so you can control the extra education expenses on books, electronics, and dorm supplies.
On-time payments are crucial
How much you pay in interest for car loans, mortgages and credit cards is largely dictated by your credit score. The lower your score, the more you’ll pay in interest. The higher your score, the cheaper it will be to borrow. Cosigning a student loan can affect your credit score: both positive and negative. “If there are late or missed payments, that will harm the credit rating of the cosigner,” says student loan expert Heather Jarvis. However, on-time payments can help improve your credit score. One way to make sure payments are made on time is to sign up for automatic payments. With College Ave, if you sign up for automatic payments, you‘ll receive a 0.25% interest rate reduction, helping to save you money over the life of your loan.
Know your financial priorities
Paying for college is one of the biggest investments you’ll make in your child’s future. However, are there other big investments or expenses ahead? When approving you for credit, lenders pay close attention to your debt-to-income ratio (DTI) to gauge your ability to repay. DTI is the total amount of debt you owe each month compared to how much you earn. When you cosign a student loan, be aware that debt gets added to your credit profile, too. If the DTI percentage is above 43%, it may be hard to get approved for other loans. In other words, if you cosign a student loan for $10,000, that’s $10,000 less in borrowing capacity you’ll have until the loan is paid off. “Cosigning ties up credit you might want or need to use later,” says Jarvis. As with other loans, make sure you take into consideration your financial goals before committing.
You can get a cosigner release: here’s how
A cosigner release is when cosigners are released from the debt, typically once the borrower makes consecutive payments for a predetermined time. It’s usually anywhere from 24 to 48 months and may require a credit check. Not all private student loans offer this option, so be sure to do your research on any student loans you cosign.
Bonus
Pre-qualification helps you plan, without harming credit
When shopping around for student loans, whether you will qualify and what rates you can expect are likely some of your biggest questions. With the College Ave Student Loans pre-qualification tool, a cosigner can check to see if he or she pre-qualifies for a College Ave loan in less than three seconds. You’ll be able to see what rates you can personally expect before you apply, and without impacting your credit score.
Before you cosign, consider the above. As you and your child get ready for the next steps ahead, make sure your expectations around student loans are part of the discussion.
