Last night, my daughter ran into my room brimming with excitement about a theatre school in New York City that she absolutely must attend next year. Being the proud ‘drama mama’ that I am, I didn’t simply shoot her down. Instead, we paid a visit to the school’s website. Everything looked amazing, but there didn’t seem to be any mention of tuition or fees. Intrigued, I searched for the ever-elusive Net Price Calculator that schools are expected to post on their websites. Surely this would tell me what my daughter’s dream school was going to cost me, right? I punched in our income figures, answered a few general questions, and up popped a number that made me suddenly sick to my stomach. Even after scoring a potential $4,000 scholarship, and taking out the maximum in student loans ($5,500), our responsibility would be a whopping $35,000 per year. Ouch! The number, however, didn’t seem to deter my daughter. She simply turned to me and said, ‘You can co-sign on a private student loan with me, right?’ Technically, the answer is yes. My husband and I both have good credit, but should we help finance this expensive dream? Before co-signing on any student loan, whether for your child or a friend, here are some things you should consider.
1. History May Repeat Itself
If the person requesting your help to cosign a private student loan has a history of not following through on promises, doesn’t have a history of making good financial decisions, or can’t seem to save any money, you may want to reconsider signing your name to a student loan agreement. Remember, you are equally responsible for paying back the loan. If the borrower fails to make his/her payments on time, you can be sure the lender will come looking for you.
2. Your Credit Could Be Damaged
You may have great credit right now, but taking out a large student loan could make it more difficult for you to take out other loans or credit cards. If you think you may want to make a major purchase, such as a car or a new home, you may not want to co-sign at this time. Additionally, you must be prepared to have your credit score lowered should the other person fail to make payments on time. It only takes one missed payment to negatively affect your credit score.
3. The Loan Obligation Goes Beyond the Amount Financed
The amount borrowed is not the amount the borrower will end up paying over the life of the loan. Deferment, forbearance and interest can add a hefty amount to the total cost of the loan. If you become responsible for repaying the loan, you need to consider that your obligation will include the amount borrowed, accrued interest and any other fees incurred during the course of repayment.
4. The Debt Could Hurt Your Relationship
It’s not uncommon for students to default on their loans. In fact, nearly 7% of private student loan borrowers in repayment are seriously delinquent or in default as of Q3 2013. If you decide to co-sign on a student loan, you must be prepared to assume that debt if the borrower fails to make their payments. If you are financially unable to make the payments, it can have serious repercussions. Not only will your credit suffer, but also your relationship with the other person on the loan. I have seen money pull families apart all too often, so think long and hard before you take out any loans you can’t afford to repay.
5. It’s Very Difficult to Remove Yourself From the Loan
Don’t co-sign a student loan with the expectation that you can simply remove your name at a later date. Although most lenders offer a co-signer release, there are some hoops the borrower must jump through first. One, depending on the lender, he/she must make consecutive, on-time payments. This can be as few as 12 months (Sallie Mae) or as many as 48 (SunTrust). In addition, the borrower must provide proof that he/she meets income requirements and has a satisfactory credit score. There is no guarantee that even after payments are made on a timely basis that the lender will let you out of your commitment. There are even some cases where a borrower has died and the co-signer was still required to pay back the loan. And forget about bankruptcy; it’s nearly impossible to have student loans discharged. If you sign on the dotted line, expect to share the responsibility for that debt until it is paid in full.
Consider These Tips to Safeguard Your Credit
If you feel confident that your child (or other borrower) is responsible and you want to help by co-signing on a student loan, be sure to consider the following safeguards.
- Make sure the student exhausts all federal financial aid options including federal student loans before considering a private student loan.
- Encourage the student to diligently pursue scholarships and grant opportunities.
- Only borrow what is absolutely needed. Play it safe by not taking out more than one years’ anticipated salary (borrower’s) upon graduation. For example, if you expect your child to earn $35,000 at his/her position, don’t borrow more than $35,000 in total student loans while he/she is in college.
- Have the borrower sign an agreement that stipulates he/she will repay any missed payments and/or fees you cover over the life of the loan. This way, if you do end up in court, you may be able to recoup some or all of your losses.
- Take charge of the student loan payments. It could be months before a student loan servicer or creditor contacts you about missed payments. By then, the damage to your credit score has already been done. Save yourself the trouble by mailing in the payments or submitting them electronically online. In some cases, lenders offer an incentive for using automatic payments.
Although I would love to help my daughter pay for her dream college, taking on a potential debt of $140,000 just doesn’t make financial sense. If she were to default on the loan, we could lose our retirement savings, home and other assets. She may be a little upset with me right now, but I’m confident that we can find another ‘dream’ school that’s a little more within our family’s budget. Saying no to your child (or a friend) is never easy, but in the end you must do what’s best for your financial security.