Sending your child off to college is a major milestone towards their independence. But if your kid decides to get a private student loan, they will most likely need to have a cosigner. Typically, that means mom and dad step up to the plate.
Should parents cosign on student loans? The answer will depend on such factors as your risk tolerance, your child’s probable ability to repay the loan, and if it makes sense for your family and your finances.
Cosigning for a student loan has benefits and disadvantages. There are also other options that can help bridge the gap between the cost of higher education and what you’re able to pay.
This guide will provide important facts to know about being the cosigner on a private student loan.
Key Points
• Cosigning for student loans is often necessary due to students’ limited credit history, with about 92% of private undergraduate loans requiring a cosigner.
• The decision to cosign involves considering potential risks, such as impacting personal finances and the possibility of strained family relationships if repayment issues arise.
• Alternatives to cosigning include pursuing federal financial aid, scholarships, and encouraging students to build their own credit history through responsible financial practices.
• Parents can opt for a Direct PLUS Loan, allowing them to cover educational costs directly, but they bear full responsibility for repayment, often at higher interest rates.
• Exhausting all federal aid options is crucial before considering private loans, as they can help fill educational funding gaps while avoiding unnecessary financial burden.
Why Are Student Loans Cosigned So Often?
It’s no secret that the cost of college education has skyrocketed. Consider these statistics:
• The average cost of college has doubled since year 2000.
• The current average cost for one year of college at a public institution is $26,027, including living expenses, with tuition and fees costing $9,678 in-state and $27,091 on average out-of-state.
• For a private, nonprofit university, that number rises to $55,840 on average, with tuition and fees accounting for $38,768 of that sum.
There are many kinds of funding and different types of student loans to contemplate when budgeting for college. 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 cosigners sometimes step in.
But do students have to have a cosigner 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 cosigners. Roughly 92% of all private undergraduate student loans have a cosigner.
💡 Quick Tip: You’ll make no payments on some private student loans for six months after graduation.
What Are the Downsides to Cosigning 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 cosigning for your child’s private student loan is not without potential repercussions. Think over the following:
• When wondering “Should I cosign a student loan?” do consider 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.
• Cosigning 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 student loan 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.
Recommended: What Is a Credit Bureau?
What Are Alternatives to Cosigned Loans?
Do parents have to cosign student loans? Not necessarily. And so you may wonder what options you have to cosigning a loan for your child’s education. Here, a few to know about:
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.
Establishing Their Credit Score
There are also some other pathways to consider when trying to find loans without a cosigner. 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. A couple of pointers:
• 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.
Scholarships
Loans and scholarships can go hand-in-hand to make college affordable. 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.
Merit 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.
Recommended: Pennsylvania Student Loan and Scholarship Information
Budgeting
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 cosigner on a student loan. One idea might be to start a low-cost side hustle. Another could be to take a year off to work — this may be enough to close the gap, avoiding the need for a loan altogether.
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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 — 8.05% for the 2023-2024 school year versus 5.50% for Direct Subsidized Loans and Direct Unsubsidized Loans.
However, in this scenario, you won’t be asking yourself, “Should a parent cosign a student loan?” because you’re helping fill the gap without depending on your student to pay the loan back.
💡 Quick Tip: Would-be borrowers will want to understand the different types of student loans that are available: private student loans, federal Direct Subsidized and Unsubsidized loans, Direct PLUS loans, and more.
The Takeaway
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 a good choice to help your child complete their college education.
If you’ve exhausted all federal student aid options, no-fee private student loans from SoFi can help you pay for school. The online application process is easy, and you can see rates and terms in just minutes. Repayment plans are flexible, so you can find an option that works for your financial plan and budget.
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