Should parents co-sign on student loans?
If your child chooses to get a private student loan, they will most likely need to have a co-signer.
Should parents co-sign on student loans? That depends on your tolerance for risk, your child's projected ability to repay the loan, and if it makes sense for your family.
Co-signing for a student loan has pros and cons. There are also alternatives that can help bridge the gap between education costs and what you're able to pay. Here's an overview of some key facts to know about co-signing on private student loans.
Why are student loans co-signed so often?
It's no secret that the cost of college education has skyrocketed. The annual tuition for a private, nonprofit college has tripled to $37,200 in the last 20 years. And that doesn't include room, board, or any other fees. Add those in and you can expect to pay an average of $53,949 a year for a private, nonprofit college. Prices for public universities have also increased, with the current annual in-state tuition at a four-year, public university at $9,580. Room, board, and fees average an additional $16,284, for a total average annual cost of $25,864.1
And when savings, federal student loans, federal work-study, and scholarships or grants can't fill the gap, students may look to private lenders to help them cover the rest. Unfortunately, students just starting out usually don't have the credit history needed to get a loan from a private lender, so co-signers sometimes step in.
But do students have to have a co-signer for a private student loan? Almost always. Since many lenders won't lend money to young adults with no or little credit history, they typically require co-signers. Roughly 91% of all private undergraduate student loans have a co-signer.2
What are the downsides to co-signing my child's loan?
If you're looking to privately fund your child's education costs, it means they likely need the help to pay for college, just like many Americans do. But co-signing for your child's private student loan is not without potential repercussions.
One of the chief considerations before cosigning concerns your relationship with your child. If something goes wrong—missed payments, extended unemployment, or worse, default—the potential for financial stress could create the possibility of misunderstandings and hurt feelings. If your relationship with your child is already tenuous, bringing financial stress into it will likely not help.
In addition, co-signing could put your own finances at risk. You may have the most responsible young adult in the whole state, but if something goes awry and the loan goes into default, the lender may sue you or hire a collection agency to try to recoup the debt.
A default might also tarnish your credit score. Simply signing the loan also affects your score. Even if you're not the one making payments, you're still responsible for the loan, according to the major credit bureaus.
What are alternatives to co-signed loans?
1. The first step for federal aid: FAFSA®
Do parents have to cosign a private student loan? The answer in the previous section was "almost always." The "almost" part of that answer is "not if they can find other sources of funding." Scholarships and grants, which don't have to be repaid, are a good place to start, but they often don't cover the entire cost of an entire college education. The first source of funding that should be exhausted before any others is federal student aid.
Filling out the Free Application for Federal Student Aid (FAFSA®) is the first step to figuring out how much federal (and frequently state) financial assistance your child is eligible for. You'll add your financial information that will determine the amount of federal assistance, which includes Direct Subsidized Loan, Direct Unsubsidized Loans, and other student aid from the federal government, like grants and work-study. Some states and colleges also base merit aid on FAFSA information, so the application is an important one for all types of financial aid, not just federal.
2. Building their credit score
There are also some other pathways to consider when trying to find loans without a co-signer. One good idea is to have your child start building their credit history. A credit score is typically enhanced over time as the record of their successful payments grows, along with other factors like their outstanding debt, credit mix, and more.
Your student might start by either getting a secured credit card at a credit union or other financial institution, then showing they can make timely monthly payments on a purchase.
If your student is trustworthy and mature, you could also consider adding them as an authorized user to a credit card you already have. You'll be responsible for making the monthly payments, but they could benefit from your financial behavior.
Like the real estate mantra concerning location, the college payment mantra might be, "Scholarships, scholarships, scholarships!" Money you don't have to pay back? Yes, please.
The FAFSA will help colleges determine what federal student aid, scholarships, and grants your child might qualify for, but don't let your student stop there.
Scholarships come in all sizes and from diverse sources, including local and national organizations, heritage associations, and various writing and other contests sponsored by nonprofits and other organizations. It might help to look at groups that your family might be closely associated with, such as unions, professional associations, or alumni organizations.
Keep in mind that your child can apply for scholarships while they are still in college, because some are tied to college majors, and your student is likely to have settled on a major after the first year or two. This could open up scholarship options that couldn't be considered before they declared a major.
You might also be able to forego cosigning a student loan by making strategic decisions about education costs. Can your student reduce the overall cost of college by ditching the meal plan, living off campus, or even attending a significantly less expensive college?
Or, instead of paring down expenses, maybe your student could consider boosting their income to avoid the need for a co-signer on a student loan. One idea might be to take a year off to work—this may be enough to close the gap, avoiding the need for a loan altogether.
5. Loans for parents
Parents who don't mind shouldering more of the cost can also take out their own federal student loans with the Direct PLUS Loan, sometimes referred to as a "parent PLUS loan."
Even though your student benefits from the loan, they are not the borrower and you'll be solely responsible for paying it back. Some parents may consider working out a repayment arrangement between themselves and their student. If this will be the expectation, however, it's a good idea to discuss the arrangement with your student before taking out this type of loan.
Direct PLUS Loans can also be taken out by graduate or professional students. Whether a parent or a graduate student, there is a downside for the borrower. The interest rate for Direct PLUS Loans is often higher when compared to other federal student loans—6.28% for the 2021-2022 school year. But you won't be asking yourself, "Should a parent co-sign a student loan?" because you're helping fill the gap without depending on your student to pay the loan back.
There are options available to eligible students before considering a private student loan. However, if all other options have been exhausted, a private student loan can be an alternative to help your child complete their college education.
This material is provided for general and educational purposes only. Neither Voya ® nor its affiliated companies or representatives provide tax or legal advice. Please consult a tax adviser or attorney before making a tax-related investment/insurance decision.