As a parent, you want to help your kids out, especially when they are starting college. After all, you want them to get their education, and cosigning for a student loan may seem like a great way to support them.
Generally, if you have good credit, choosing to cosign on a student loan can give your kids access to better interest rates. But, there are risks when you become a cosigner too, so you shouldn’t automatically jump in.
Since most American students end up going to college with student loans, being their cosigner can greatly aid them. If you’ve already cosigned a loan for your kid or you’re considering cosigning a loan now there are programs to help afterwards. The refinance Parent PLUS loan lowers interest and offers better terms so if you do get a loan, you’ll get the best deal.
To help you decide if you should cosign for that student loan, here’s what you need to know.
What are the Benefits When You Cosign on a Student Loan?
If you have good credit, cosigning can do a lot to help your child out. First, it may increase their odds of securing the loan, ensuring they have the funds they need.
Second, it makes it easier for your kid to establish their credit history and can give yours a boost too, depending on your current situation.
Finally, your kid may get a better interest rate if you have solid credit. Borrowers with little to no credit history are generally considered higher risk. But, if you put your credit on the line, the risk is less, making it more likely that the lender will offer a lower rate.
What are the Risks of Cosigning?
The biggest risk of choosing to cosign on a student loan is that you are just as responsible for the debt as the primary borrower. This means the amount owed shows on your credit report, as well as the payment history.
If your child misses a payment, your credit score will take a hit. Plus, the lender can come after you for the missing payment. If your kid defaults, the repercussions affect you as well. This means you need to be ready to pay the loan back if your child can’t, or you’ll both face the consequences.
In fact, your wages can be garnished if your child doesn’t keep up with the payments.
Additionally, since the loan is also in your name, it can affect your ability to obtain other forms of credit. The amount remaining on the loan impacts your debt to income ratio, even if you aren’t the one making payments. This could make it harder to buy a house or vehicle, or open a new credit card or other financial product throughout the life of the loan.
Deciding Whether to Cosign for a Student Loan
Ultimately, you have to weigh the risks and rewards to determine if you should cosign for a student loan. Even if your child has the best of intentions, there’s no guarantee that you won’t be on the hook for the payments. Plus, if you have a major purchase in your future you’d like to finance, this may be more difficult.
Before deciding, you need to examine your long-term plan and financial situation to determine if you can shoulder the potential burden. And, if you can’t, it’s okay not to put yourself on the line. But, if you are comfortable with the risks, it can make a significant difference in your child’s future to cosign for a student loan.
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