Sometimes federal student loans issued to students aren’t enough to pay for college after scholarships, savings, parent contributions, and grants. To fill in the gap, parents may consider borrowing funds in their own name or cosigning a loan for their child. After all, many students can’t borrow private loans on their own due to limited credit history or insufficient income.
However, cosigning a loan will also affect your credit history as a parent, and you can’t guarantee your student will earn enough after graduation to repay student loans on their own.
To protect yourself and your student’s credit, here’s what you need to know about cosigning a student loan.
How Cosigning a Private Student Loan Works
A cosigner is a person who agrees to pay off a loan if the primary borrower doesn’t. The cosigner generally has higher income and better credit, which allows the student to get approved for a loan and receive more attractive interest rates. Often, you’ll cosign a loan for a child or spouse, but grandparents and other close family members may also consider cosigning a loan for a student.
“In many respects, cosigners are ‘co-borrowers’ because they are equally responsible for the loan,” says Richard Castellano, Sallie Mae spokesperson. Any missed payments are reported to credit bureaus for both the borrower and the cosigner.
How Cosigning a Federal PLUS Loan Works
Federal student loans issued directly to an undergraduate student won’t need another person to cosign the loan. But parent or graduate PLUS loans may need an endorser — the Department of Education’s word for cosigner — if the parent or graduate student is denied because of adverse credit.
Endorsers have all the responsibilities of a cosigner on private student loans. However, the federal government has more alternatives to endorsers. Dependent students are given higher loan limits on unsubsidized loans if their parents aren’t approved. The Department of Education also offers parents an opportunity to explain extenuating circumstances that caused adverse credit and possibly avoid needing an endorser.
What to Discuss Before Cosigning a Student Loan
Cosigning a loan for your child or loved one is a generous thing to do, but it also comes with major risks. It’s important to have an honest discussion before committing to anything since you’re putting your credit and financial health on the line.
Here are some important points to figure out before you cosign on any loan.
- Decide who will be responsible for monthly payments. Will the student pay in full, or are you willing to pay all or a portion of the required payments?
- Explain what you’d like to happen if the student can’t afford their payments. For example, you may ask your child to inform you ASAP if they can’t make a payment. Just one missed payment on their part can hurt both your credit scores, so the primary borrower must be proactive if they’re struggling to afford this debt on their own.
- If you think the student may need some extra guidance, make sure you have online access to the account. Some lenders automatically set this up for the cosigner, but you may need the primary borrower to give you access to the account. This way, you can keep an eye on things and make sure repayment is progressing as it should.
- Always make sure the lender has your updated contact information. If the student misses or ignores notifications from the lender, you want to make sure you stay in the loop so you can take action if needed.
- If the primary borrower isn’t well-versed in how debt, budgeting, or basic finances work, consider asking them to take a financial literacy course. This can help them avoid simple mistakes in the future and save you both some big headaches.
- Consider alternative payment plans if you don’t trust the student to handle this loan responsibly. For example, you could ask your child to make payments to you while you pay the lender directly from your own account. While it’s not ideal for your child to miss a payment to you, at least your credit won’t be hurt since you can continue to pay the lender as normal.
Put everything you and the primary borrower discussed in writing and save it someplace safe. This will help both you and the student remember what you agreed upon, even several years down the road.
Above all, be realistic about your abilities to repay this loan. A cosigner is meant to provide support to the primary borrower, but if neither you nor the student can afford this debt both of your credit scores will be seriously harmed — and that doesn’t help anyone.
Always plan for the worst-case scenario. If you can’t afford to repay the entirety of this student loan, don’t cosign on it. Instead, you can help the student research and apply for other funding options, or provide alternative support such as allowing them to live at home rent-free.
How to Make Sure the Student Pays the Loan Back
The general rule for student borrowing is to borrow no more than one year of the average starting salary for their major, or 10 to 15 percent of their estimated monthly income post-graduation. This amount should include both private and student loans.
For example, say the average starting salary for an English major is $35,000. That means that upon graduation, the student’s loans probably shouldn’t total more than that amount. If you break that annual salary down, English majors can expect a monthly income of about $2,900 — which means the student’s monthly loan payment should range from about $300 to $435 (that’s 10 to 15 percent of their income) to remain affordable.
You won’t know ahead of time exactly what students will earn post-graduation. But you can get an idea by using Edmit’s software, PayScale.com, or the college career office. If a student is unsure of their potential major, look up salaries for jobs among their possible choices. Pick the lowest amount as a safety number to help them figure out how much debt to take on.
If you cosign a loan for a student, don’t expect them to pay back more than those numbers you researched. That way you know how much you may be paying out of your own pocket once repayment starts.
How to Take Steps to Protect Yourself
While you do your research and prepare to cosign, take some steps to protect yourself:
- Read the entire promissory note of the loan. You’ll want to fully understand what circumstances trigger a loan default and if there is any flexibility in payment plan options.
- Next, ask if the loan comes with a death or disability discharge for the main borrower. Without this clause, if the main borrower becomes disabled and can’t pay, or the borrower dies, the cosigner may still be responsible for paying the loan.
- If the loan doesn’t have a death or disability discharge clause, you may want to get a life insurance policy on the borrower for the amount of the loan in case you have to pay it off yourself.
How Cosigner Release Options Work
For private student loans, cosigner release is an option for the borrower to remove the cosigner from the loan after proving their own ability to repay the loan. Proving that generally means making 12 to 24 on-time payments and showing that the primary borrower has the income to repay the loan themselves. (This is another reason it’s important to ensure the amount borrowed is responsible in the context of what the student will make after college!)
For parent PLUS loans, the release process is a bit different. The parent can consolidate their loans to release the endorser from responsibility for the loan. Consolidation is when you take multiple loans and combine them into one. Parents may want to consolidate all their parent PLUS loans together, but they should probably leave out student loans issued in their name from when they were students; this protects the extra payment options available on federal loans issued directly to students.
The 5 Most Important Takeaways:
- Cosigners are co-borrowers. When you cosign a loan, you are equally responsible for payments.
- The student loan payment record is reported to credit bureaus for both the cosigner and the borrower.
- For private student loans, a cosigner release may be possible with 12 to 24 months of on-time payments and proof of sufficient post-graduation income.
- Don’t cosign for a loan you can’t pay back. For the sake of your finances, don’t borrow more than the student can pay based on their projected income.
- The endorser on a parent PLUS loan can be released when the parent consolidates their loans, most likely after the student graduates.