Student loans are a necessity for the majority of young people attending colleges and universities. With the rising costs of education, the average undergraduate student faces graduation day with around $30,000 in student loan debt. That's a steep number to tackle for anyone, especially a young adult first entering the workforce.
If you know you're likely to face significant debt right after graduation, it's important to research your student loan options. One common practice is to allow parents with higher credit scores to cosign student loans. While this option might seem like a simple way to secure money for school, there are pros and cons to consider that have long-lasting effects on your family's financials.
When your parents might cosign your student loan
Student loans and financial aid come in various forms. Your eligibility for federal student loans and grants is determined when you file your FAFSA each year. Though college students are eligible for federal loans each year, most only receive about $5,500 to $7,500 annually. Given today's high tuition rates, many students max out these funds and need more financial assistance to get them through the school year.
If you've already explored scholarships, work-study programs, and grants, your next step is likely applying for private student loans. Student loans from private lenders have notoriously high interest rates and short repayment terms. According to the Federal Reserve, the average monthly student loan payment is between $200 and $300, which makes securing a favorable interest rate a crucial step for borrowers.
Pros of parents cosigning your loan
Approximately 93% of private student loans for undergraduates were cosigned by parents last year, according to MeasureOne data cited by Consumer Reports. cosigning a loan is clearly an option many families choose to provide an education for their children. One of the most advantageous benefits to having parents cosign your loan is the financial doors it allows you to open.
Qualifying for additional funds
The typical college student has minimal income and even less time to earn money while attending school. That usually also means they haven't had much time to build the credit necessary to qualify for a private loan. If you do manage to qualify for a loan, the interest rates are likely to be much higher than those available to individuals with higher credit scores. If your parents are willing to cosign your loan, you'll be eligible for more money and more manageable interest rates.
Lower available interest rates
Many private student loans offer lower interest rates than Federal loans do, especially if your parents cosign. The loan financer will factor in your parents' credit scores to determine the terms of your loan. Depending on the available interest rates, you could secure better terms than your federal loans. Note that these rates can be variable in some cases, which means they're subject to change during the life of the loan. A fixed rate is often a safer bet, even if it's a little higher than the variable rate you're initially offered.
Even the most generous parents might feel more comfortable cosigning your loans if they can relinquish responsibility at a later date. As co-borrowers, they're equally responsible for repayment and equally liable if you default. A cosigner release provision is available with some loans and allows your parents to remove their names from your loan after you make a certain number of payments.
Cons of parents cosigning your loan
Even with a cosigner release provision, allowing your parents to cosign your student loans is an epic financial commitment that shouldn't be made lightly. When researching available loans, make sure both you and your parents are aware of the risks.
It's important to familiarize yourself with the repayment terms of your student loans. With federal student loans, you usually have six months following graduation before payments are required. Most private loans, however, require payments to be made while you're still taking classes. Depending on how much time you have for work, this financial responsibility might fall to your parents. Make sure they're ready to assume that burden.
As co-borrowers, your parents aren't simply helping you get a loan: They're applying for the same financial obligation. If you're unable to repay your loans, your parents are legally responsible for that amount. They could get stuck with a huge bill, and if they're unable to pay it, their credit score could tank.
The raised risks of default
If neither you nor your parents can repay your private student loans, then the loans will enter default. The amount remaining on your loans will then be sent to collection agencies, which means your wages and those of your parents can be garnished. You'll also be ineligible for further federal student loans, and the lender can sue you and your parents for the remaining balance. In addition to the financial strain, you're likely to experience significant emotional strain.
When choosing how to pay for college, it's important to examine how repaying your loans will affect your financial future. Make sure your monthly loan payments after college will realistically fit in with other expenses like car payments or saving up for your first home after graduation. If you're unable to meet repayment terms, your parents will be left with the financial responsibility.
If you absolutely have to secure a private student loan that requires your parents to cosign, make sure you shop around for the best rates, secure a cosigner release, and understand repayment terms and responsibilities fully. It's important not to sacrifice your family's financial health for your education.