It is back-to-college season! Twin extra-long sheets, check. Textbooks, check. Meal-plan, check. Student loans, check?
The rising costs of higher education have forced more and more families to use student loans as a way to afford college. The class of 2015 graduated with more student loan debt than any class in history. In fact, 7 out of 10 graduates are leaving campus with a student loan statement in hand.
Private student loans have become a popular option for families looking to fill the gap between financial aid and the cost of attendance. Over the last couple months, you may have seen a flurry of private student loan commercial from a number of large banks including Wells Fargo, Discover Financial, and Sallie Mae.
Unlike federal student loans, private student loans are issued on the basis of creditworthiness. Most students cannot get approved for a private student loan without the help of a cosigner. In fact, 90% of private student loans are issued with a cosigner. Many parents and grandparents are now facing a difficult question: Should I cosign a student loan for my son or daughter?
Cosigning a student loan is an important financial decision. Before you cosign a student loan this back-to-college season, you should know the risks.
You are equally responsible for the student loan.
When you cosign you are agreeing to assume joint responsibility for the student loan. Meaning, you are 100% on the hook for the student loan if your child can’t pay back their debt. If your child is late on payments, or even in default, you will be responsible for ensuring the loan is paid back on-time.
Student Loans cannot be discharged in bankruptcy.
Unlike other types of loans, most student loans cannot be discharged in bankruptcy. Before cosigning, know that you will remain responsible for the debt even if you or your child files for bankruptcy. Only in very particular circumstances can student loans be discharged in bankruptcy. For most of us, bankruptcy is not an option.
Cosigners are in for a long commitment.
Student loan repayment is usually spread out over the course of 10 to 15 years. When you cosign, know that you will be equally responsible for the entire duration of the loan. Some lenders offer cosigner release, but not all do. Before cosigning, check to see if the lender offers a cosigner release benefit.
Cosigning can hurt your credit.
When you apply for a private student loan as a cosigner, the lender will pull your credit. Too many hard credit inquiries can damage your credit. If your child falls behind or late on the student loan your credit can be negatively affected too. When you cosign, you are putting your creditworthiness in the hands of the primary borrower. Moreover, too many cosigned student loans can be a red flag when applying for credit in the future.
Before cosigning a private student loan you should look for alternatives. Federal student loans do not require a cosigner. And even better, push your child to look for scholarships and grants. Scholarships are free money. Too often students and families convince themselves that scholarships are out of reach. Scholarships are available for every niche on the planet. Get creative and spend some time applying!