Should I Get A Cosigner For My Student Loan?

For many recent high school graduates, the question of how to finance an education is a daunting one.

Some avoid student loans. They save money by attending a community college, they work for a year to sock away cash or they take less expensive online courses.

Yet for many college students, the cost of education plus housing, food and other expenses outpaces cash on hand. In those cases, student loans are a common alternative.

Cosigning opens someone other than the borrower to great financial risk.

Key Point: Not All Student Loans Require a Cosigner

Federal loans don’t require a cosigner. Still, there are limits on how much you can borrow each year and in total.

The cap on the total you can borrow as a dependent undergrad is $31,000, well below the tens of thousands of dollars required to complete a four-year degree at many public and private schools.

To get more, many students turn to private student loans cosigned by a parent.

3 Benefits of Cosigning a Student Loan

1. One of the most obvious benefits of a cosigned student loan is the ability to borrow money in excess of federal student loan limits.

2. Another potential benefit is the ability to obtain a private loan, giving the borrowers choice as to the institution they prefer working with, interest rates and other factors.

“These loans frequently require a cosigner. Due to the nonexistent or short credit history and high debt-to-income ratios of the student borrower, these loans are considered higher risk to the lender,” Carter points out.

“Some lenders allow borrowers to apply to have their cosigner released (taken off the loan) after they have graduated, made a specified number of on-time payments and/or meet certain credit requirements.”

3. Beyond risk-management, a cosigner can open financial doors previously inaccessible to students.

“Even if the borrower could be approved on their own, having a creditworthy cosigner can result in lower interest rates and fees,” Coleman says.

4 Disadvantages of Cosigning a Student Loan

Students and parents should keep in mind that student loans can have financial reverberations that resonate for years or even decades.

1. Both borrowers are equally responsible for repayment under a cosigned student loan. “The exception is the federal Parent Plus Loan,” says Coleman. For this federal program, the parent is solely responsible for repayment. “This has surprised some Parent Plus borrowers,” he says.

2. Cosigned loans show up on a cosigners’ credit report, which can potentially impact their credit score.

“If payments are missed (30 days late or more), the late-payment history is reflected both on the student’s and the co-signer’s credit report,” Carter says.

“One or more late or missed payments for someone with good credit history can significantly lower their credit score, possibly putting them at jeopardy of not qualifying for future loans and/or not qualifying for reasonable interest rates.”

3. Private loans, including those with a cosigner, often have higher monthly payment requirements than federal loans.

That’s because most private student loans do not offer income-based repayment plans.

4. Although the federal government will discharge or forgive loans if the borrower becomes disabled or dies, private loans don’t always include those provisions. The remaining borrower is still required to complete payments.

“If private student loans are still necessary, both the student and parent should have a clear picture on how much overall debt they are taking on, what the approximate monthly payment obligation will be, and what the student may be able to expect as far as job prospects and possible starting salaries for their field of interest,” Carter says, “in order to make sure it is financially feasible for them to afford repayment.”

Conclusion: Shop Smart to Pay for College

Shop around

Compare offers from several schools before selecting where you will go, advises Barry Coleman, vice president of counseling and education at the National Foundation for Credit Counseling (NFCC) in Washington, D.C.

Also evaluate the student’s cost of attendance, a metric that covers tuition and fees as well as room, board, books, supplies and loan fees, among other expenses.

Parents with students who are several years away from graduation should keep this list in mind because managing those costs will only become more important with time.

“As school-related expenses continue to rise, it is expected that borrowing levels will continue to rise as well,” Coleman explains. “There is nothing to suggest that college will become more affordable, or that borrowing levels will decrease in the next two to five years.

Read the fine print

Students and parents should have a clear understanding of financing before taking out a student loan of any kind, including a cosigned loan, adds Noelle Carter, chief administrative officer at Consumer Credit Counseling Service (CCCS) of Buffalo in West Seneca, N.Y.

“Don’t just sign on the dotted line and worry about it later, the debt will be with you, possibly, for a very, very long time,” Carter says. “Student loans allow college access to many who would not be able to afford a college education without them. However with the benefit comes responsibility.”

Study hard, and choose wisely.

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