Parents have big dreams for their children — and very often college is one of those dreams. After all, every parent wants their child to have the best shot at success in life!
However, by the time a child reaches college age, if the parents were unable to save for his or her college education — or those savings have run out — they might be left scrambling for what to do. Or perhaps the child wants to pursue a medical or professional degree and money saved or scholarships just won’t foot the bill — then what are your options?
Well, there’s one option you definitely should avoid like the plague: Co-signing on a private student loan.
Why you shouldn’t co-sign
Co-signing on any kind of loan comes with a lot of risks. According to an FTC study, 75% of people who co-signed on a loan or credit card ended up paying for at least part of the co-signed debts.
And when it comes to covering the cost of college, the risks can be even worse, because obviously college is expensive.
According to the College Board, the average cost of tuition and fees for the 2015–2016 school year was $32,405 at private colleges and $23,893 for out-of-state residents attending public universities. If you want to become a doctor or lawyer, the costs are even steeper: Median tuition and fees at private medical schools in the 2012-2013 academic year was $50,309.
The total outstanding student loan debt is currently $1.3 trillion in the U.S. and rising every minute, which means that many of us are saddled with student loan debt — debt that may be very risky in the event that life after college doesn’t go exactly as planned.
You might not think that student loans are a kind of bad debt. After all, this is the kind of debt that will have a strong return on investment, right? That’s true for the person going to school — they’re betting on their own success and ability to pay off the debt.
But when it comes to a co-signer, it’s a different story.
Many people do not realize what they are putting on the line when they sign the dotted line. It may be well-intended, but if your son or daughter (or any friend or family member, for that matter) asks you to co-sign on a loan, you could put your financial future in grave danger.
According to a 2012 report by the Consumer Financial Protection Bureau (CFPB) and Department of Education, about 90% of private loans are co-signed by a parent, up considerably from previous years. Sadly, a 2014 Citizens Financial Group survey revealed that 94% of parents with a child in college said they felt more burdened due to their children’s college loans. In addition, around 50% of parents did not have a plan to repay their child’s student loan debt
And the scariest part? Over 50% of parents say these student loans are putting their retirement in jeopardy!
Richard Cordray, director of the CFPB, said in a recent statement, ‘Parents and grandparents put their financial futures on the line by co-signing private student loans to help family members achieve the dream of higher education.’
A co-signing parent helps students get more credit and a lower interest rates, but co-signing comes with strings attached. Basically, if the student cannot or does not make monthly payments on the loan, then the parent is 100% responsible for the loan. And if the parent doesn’t pay? Their credit could be damaged for years to come.
‘Before co-signing a student loan, parents have to remember that they will assume equal responsibility for repaying the loan,’ cautioned Vince Passione, CEO of LendKey, a student loan refinancing site. ‘Late payments can affect their credit as well and not just their child’s.’
As a co-signer, you may not be privy to all the facts
Banks are not obligated to keep co-signers up to speed on the status of a private student loan. If the borrower has missed payments, the co-signer may never know until the loan is already in trouble, even though their Social Security number and financial data are tied to the loan.
Stuart Ritter, a senior financial planner at T. Rowe Price, noted that in the case of delinquency, the financial institution can go to the co-signer first to recoup the full amount of the loan. ‘Often, the reason the lender wants a co-signer is because they don’t think the primary borrower is creditworthy enough.’
In this case, it’s best to explore all of the available options for college financing before considering a private loan that needs a co-signer. Other loans that are less risky are loans through the Federal Direct Loan Program, which are completely in the student’s name. Another option is ParentPlus loans, which are completely in the parent’s name. There are also some private loans that allow the co-signer to be taken off a loan obligation after a period of time. However, this is as long as the loan is in good standing.
What do I do if I am already a co-signer?
If you are already a co-signer on a loan and you want to get out of the obligation, you might be able to refinance.
In addition, some private loans offer a co-signer release, allowing a cosigner to be taken off a loan after a set period of time — so long as the loan is in good standing.
Since there are so many risks associated with co-signing a private loan, it’s best to avoid it if at all possible, and help the student finance their education in other ways.
Check out these guides to learn how to finance any kind of education!
- Clark’s student loan guide
- Best 529 plans to help pay for college
- 5 ways to save money on your college degree
- 6 ways you can reduce costs for college
- How to get an apprenticeship and avoid student loan debt
- Education start-up offers new way for students to pay for college
- 9 ways to pay for college without student loans
- Tips to avoid student loan debt
- 11 best ways to find a college scholarship
- Cheapest college degrees that will make you $70K a year