Why Co-signing for a Student Loan Isn’t Always the Best Choice

Father and daughter signing student loan applicationThe need to earn a college degree is no longer an option for those graduating high school. Shifts in the job market have moved toward requiring some level of higher education for entry-level positions in most career fields, putting pressure on students to extend their learning and experience beyond their senior year. However, millions of families struggle to keep up with the rapidly increasing cost of college tuition. The solution, for most, is to borrow for one’s education through federal and private student loans.

There are more than 43 million student loan borrowers that owe a collective 1.3 trillion dollars back to public and private lenders, and joining those ranks is often as simple as completing a brief application. In some instances, though, the credit requirements are too stringent for prospective students to meet. When a student loan is not available for an individual student, parents and family members have the opportunity to co-sign a new loan to help secure affordable, necessary financing for education. While the ability to co-sign seems like a beneficial move, doing so requires special consideration. Here are a few reasons why co-signing a student loan is not always the smartest financial move.

You Owe, Too

A recent report published by the Consumer Financial Protection Bureau estimates nearly 90% of funded private student loans include a parent co-signer. When prospective students do not have the income or credit history necessary to qualify on their own, parents are apt to step in and sign the dotted line. While a co-signer often increases the chances of a student receiving the borrowed amount of money necessary to attend a college or university, parents overlook the fact that they are on the hook for the entire balance alongside their student.

If the primary borrower, the student, has a difficult time securing a job upon graduation, student loan lenders still require payment on a monthly basis. Parents often take on that responsibility to save their own credit from a late or defaulted payment ding, whether they have the means to do so or not. So long as a parent’s name is listed on a student loan as a co-signer, the obligation to repay is just as much theirs as it is the student’s.

Loan Default Rates

As with any contractual agreement to borrow funds from a lender, students and parents who co-sign have a responsibility to repay the loan in full based on the amount outlined in the loan agreement. And while most feel confident their child isn’t going to run from that responsibility, it happens more than one might think. The Department of Education reports that the default rate for student loans is a surprising 11% – an indicator that failing to make good on payments each month is common among student borrowers. A combination of a slow job market, unwavering wages, and five- to six-figure student loan balances make a high default rate a reality.

Parents who co-sign on student loans for their children may be swayed by the fact that some lenders offer respite from payments when times get tough. Unfortunately, most private lenders do not provide a forbearance option when financial hardship strikes, leaving parents on the line for the monthly payment until the student gets back on their feet. Not paying a student loan has the same impact as defaulting on any other debt obligation – a hit to your credit score that may make it difficult to secure new credit in the future.

Putting off Wealth Accumulation

The risk of defaulting on a student loan and its financial impact is high for parent co-signers, but arguably the most significant downside to agreeing to be responsible for a student’s debt is the deferment of wealth accumulation. Should a student borrower be unable to pay, and the monthly student loan payments end up in the lap of the parent, there may be fewer dollars to work with each month. That strain on cash flow could lead to putting off saving for retirement, paying down other debt, or setting aside funds for other financial goals. Although taking over payments for a child’s student loans is often a temporary solution, the time it takes to get back to focusing on the parent’s financial objectives can be detrimental to achieving those wealth accumulation dreams.

Co-signing on a student loan for a child is an admirable move when there are no other means to fund a college education in an affordable way. However, parents must consider the short- and long-term implications of doing so before agreeing to take on that responsibility.

Posted on October 2, 2017 by in Student Loans

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