With total student loan debt standing at $1.6 trillion in 2020, it’s a good time to assess the big picture of your own student loan dues and make sure you’ve got all the bases covered.
That’s especially the case for an overlooked segment of the student loan population -- parents, grandparents, family friends, or guardians who co-sign a student loan. While there are advantages in doing so, student loan co-signers need to know their risks and responsibilities in “backing up” a college loan for a student.
What should you know going into a student loan cosigning deal? Here are seven “must-knows.”
1. Student loan co-signers can be a big help
Often, a college student doesn’t have a credit history and a co-signer with good credit can ensure that an application for a student loan is approved. Without a cosigner, that student may not be able to attend college.
On the downside, individuals who co-sign a student loan may be left holding the debt if the student doesn’t repay the loan. In fact, a study from AARP showed that 49 percent of private student loan cosigners over the age of 50 wound up paying at least some student loan debt.
You can save cash by choosing the right private student loans — and online marketplace Credible can help. With Credible's free tools, you can compare rates from eight different lenders within just minutes.
2. The focus is on private student loans
Co-signers are only required when a student applies for a private student loan. “That’s because private loans are credit-based, and most students haven't had time to build a credit history,” said Andrew Latham, a certified personal finance counselor and managing editor at SuperMoney.com. “In fact, nine out of ten private student loans have a cosigner. Federal Parent PLUS loans don't require a cosigner, but that's because only parents are responsible for repaying them.”
Here are some of the best private student loan vendors (offering some of the lowest rates or rate discounts), according to Credible’s resident experts. Just enter the desired loan amount and see what kind of rates are currently available from multiple lenders.
3. You’re on the hook for student loan repayments
If you cosign a student loan, you become legally responsible for paying the loan if the borrower defaults. “If you can't afford to make the payments, don't cosign the loan,” Latham says.
4. To get the best deal, look at multiple lenders
Getting a good private student loan means comparing offers from multiple lenders.
“Each lender uses different criteria for underwriting the loan, and some might offer you a more favorable deal than others,” said Anna Serio, loan expert at Finder.com. “Look at factors like interest rates, terms, in-school repayment options, deferment and forbearance and cosigner release requirements.”
Student loan borrowers and their co-signors can visit Credible.com and get personalized rates from multiple lenders without affecting their credit score.
5. Be transparent – and get the deal in writing
If you're cosigning a student loan get real. “You need to have a candid conversation about your expectations and the plans for repaying the loans,” Latham added. “And always put the agreement in writing. The details for student loan repayments have a way of getting fuzzy with time.”
6. Know the repayment timetables
“Co-signers should know the exact terms of the loan - especially how long is the repayment period and when does repayment begin (it could be immediately or after the student graduates),” said Glenn Griggs, a student debt counselor at Griggs Financial L.L.C, in Tallahassee, Fla. “The cosigner should also know if the interest rate is it fixed or variable, and if there’s an early repayment penalty.”
Cosigners looking to apply for private student loans and obtain a lower interest rate can compare rate tables – both fixed and variable – from multiple vendors at Credible.com.
7. Cosigners can be released from a student loan
Some private loans will allow the co-signer to be released from the loan if the student makes 12 months of consecutive payments, or a similar consecutive repayment time period, Griggs noted. “In that regard, the cosigner should ask the student loan recipient his or her plans after graduation, specifically if their career goal supports the loan repayment requirements,” he said.
Yay or nay on cosigning a student loan?
Any individual – especially parents and grandparents with substantial retirement income needs – should give careful thought about cosigning any student loans.
“Co-signers should know they are going to be 100 percent responsible for whatever loan they sign too if the primary borrower defaults,” said Kristine Stevenson Seale, a financial coach at Advocate Financial Coaching in Austin, Tx. “So before mom or dad co-signs on that $80,000 student loan or parent-plus loan, and parents are the majority of co-signers, ask yourself this: at age 50 or so, how are you going to feel about suddenly tacking on a $500 or more monthly debt payment to your household budget? That’s a payment that might go on for 10 years or more.”
That cash needs to be going towards retirement,. “All things being equal, a parent's retirement is approaching a lot faster than a new college graduate’s retirement,” Stevenson Seale said.
“My advice? Don't do it.”