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If you have a child or family member headed to college this fall and they've maxed out the federal financial aid they are eligible for, you might be considering helping them pay for school by co-signing a loan from a private lender.
For most young people with little credit history or low to no income, the only way they can get a private loan is with a co-signer. The vast majority of co-signers are parents or close relatives, though anyone can co-sign a loan as long as they meet the credit requirements.
Underwriting standards have become much more strict since 2008, when the recession hit and student loan default rates spiked. About 93 percent of private undergraduate student loans for the 2018-2019 academic year included a co-signer, up from 74 percent in the 2008-2009 time period, according to MeasureOne, a data and analytics company that specializes in student loans.
Having a co-signer improves the student's chances of approval. Both the borrower and co-signer’s credit histories are evaluated, so the loan may have a more favorable interest rate, too.
But that puts parents and relatives in a tough spot because guaranteeing someone else’s loan carries major risks.
“People get lulled into a false sense of security when they co-sign,” says Heather Jarvis, a lawyer who specializes in public interest law and advocates on student debt relief issues. “Signing your name to the loan is the same as taking the loan out yourself.”
That means the loan will show up on your credit report. And if the borrower doesn’t make payments, you are equally responsible for it and your credit score takes a direct hit. A loan can go into default for even one missed payment, Jarvis says. If that happens, the entire loan comes due.
If you are considering co-signing a student loan, here’s what you should do before putting yourself on the hook for someone else’s college costs.
1. Exhaust Federal Options
Before you turn to a private loan, make sure the student has applied for all the federal aid he or she is eligible for: scholarships, grants, work-study, and federally backed loans. Federal loans don’t require a co-signer and come with consumer protections, such as the ability to defer or stretch out payments if you have trouble paying.
But there are limits to federal loans. Students who are dependents of their parents can borrow roughly $5,500 to $7,500 a year, depending on which year they are in school, but no more than $31,000 in total for undergraduates. Independent students can take out $9,500 to $12,500 a year and up to $57,500 total.
If that’s still not enough to cover the total cost of attendance, a parent or guardian of the student can take out a Parent PLUS loan to cover the gap.
A PLUS loan is solely in the parents’ name, not the student’s. But Parent PLUS loans have more flexible repayment options than private loans and require only a basic credit check.
“Federal student loans are much less risky and a much better option for parents,” Jarvis says.
2. Don’t Let Low Rates Fool You
Federal student loans and Parent PLUS loans have fixed interest rates, so the monthly payment is predictable. Private student loans typically have variable interest rates that may be below the rate government loans charge because of today’s low-interest-rate environment.
But variable rates can rise, and because student loans have terms of 10 or more years, the monthly payments and the total amount owed could become significantly bigger. Some banks offer fixed-rate loans, so if you are co-signing a private loan, look for those as well.
Many private loans also require payment while the student is in school. Federal loans have a grace period, so loan repayment doesn’t start until six months after graduation.
Don’t apply just to bank lenders. Credit unions and states also offer student loan programs.
“There’s no guarantee that those will be the best, but as with any loan, you should shop around,” says Betsy Mayotte, president of The Institute of Student Loan Advisors, a nonprofit that provides free one-on-one counseling for student borrowers.
3. Understand the Terms
Read the entire promissory note you and the student must sign to get the loan. Make sure you understand what circumstances trigger a default and whether there is any flexibility in payments.
Find out whether the loan comes with a death or disability discharge. More lenders are offering those clauses, Mayotte says, but if that clause is not available, the co-signer is responsible for payments if the borrower dies or becomes disabled and can’t pay.
4. Get a Co-Signer Release
Some loans come with a co-signer release provision. After a number of on-time payments—typically two years' worth—or when the primary (student) borrower achieves a specific credit score, you might be able to remove your name from the loan.
This provision can also protect the primary borrower. If the co-signer dies or files for bankruptcy, the loan is immediately put into default and has to be repaid in full. The release can prevent that, but it doesn’t kick in automatically. You have to keep track of the on-time payments and request the release when the requirements are met.
The release can be tough to get. According to the Consumer Financial Protection Bureau, less than 10 percent of borrowers who apply for a co-signer release succeed.
You can increase your chances by having the student sign up for automatic payments to ensure that payments are never late. Another good strategy: Applying for the release only after the monthly payment drops to 10 percent or less of the student's monthly gross income to show that he or she can comfortably make payments, says financial aid expert Mark Kantrowitz, publisher and vice president of research at Savingforcollege.com, which provides information on financial aid and 529 college savings plans.
Another option: If you can refinance your private loans with another lender, the co-signer will be released.
5. Check Out the Student's Finances
Co-signers should protect themselves by understanding the primary borrower’s financial situation.
Calculate the monthly payment and how much the total cost of the loan will be with interest. Can the student handle the monthly payments if he has to start payments in school? What kind of income do you expect him to earn when he graduates?
If you co-sign, you’ll also need to keep track of the loan and ensure that payment obligations are being met. If you don’t know that the primary borrower is falling behind, penalties and fees will get tacked on to the loan before you know it.
If you’re uncomfortable co-signing, don’t do it. If a student needs a co-signer, it could be that the student is borrowing more than he or she can afford. Consider other options.
One idea is to lend the student money and get paid back in installments. Another idea: The student could lower costs by living at home. Or perhaps an installment plan to pay tuition would make the payments easier to handle.
“I worry about families who take on private debt,” Mayotte says. “There are very few options if you have trouble paying the loan.”
Want More Advice? Watch This Video
Paying for college isn't easy. Consumer Reports' personal finance expert Donna Rosato shows "Consumer 101" TV show host Jack Rico tips on how to maximize aid when paying for higher education.
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