The elation of a son or daughter getting into a first-choice college can lead to many parents happily agreeing to cosign a student loan. With college costs on the rise, however, student loan cosigners and students need to be aware of the risks that cosigning a student loan can bring to a parent's credit. According to college debt expert Mark Kantrowitz in an interview with USA Today, cosigning a student loan is giving a child "the ability to ruin your credit."
A student loan can be sizable. For the 2015-16 school year,the average annual cost of a private college was $32,405, according to the College Board, and some schools cost upwards of $70,000 per year. Cosigning is more than offering a reference for a student to be approved for a loan. It means that the student loan cosigner's credit score could be in jeopardy if the student is late on payments or defaults on the student loan.
Here are three ways that student loan cosigners can work with the student to make sure the student loan never hurts their credit.
Know the Dangers
Before agreeing to cosign, parents and their children should talk through the credit risks that the parents are agreeing to. If a student misses or is late on a payment, it will ding the parents' credit. If the student defaults on the loan, the parents will be responsible for it.
The student loan also could affect parents' financial situations in the future. If they want to get a loan to buy a new vehicle or refinance a mortgage, the student loan will be counted as if it were theirs.
Make Sure the Debt Will Be Manageable Post College
When considering the amount of the loan you are willing to cosign, keep the future in mind. Figure out what the payments will be after the student graduates. Will the student be able to afford the payments with the type of job she likely will get?
If the answer is no, think through solutions. Will you or other relatives be willing to help with payments if the student can't make them? Is the student willing to get a second job to ensure that payments are made?
If paying the bill long-term seems unlikely, the student may want to consider a more affordable college.
Check In with the Student About Payments
It's not uncommon for student loan cosigners, especially grandparents and aunts and uncles who may not be in constant contact with the student, to assume that the payments are being made on time. Unfortunately, many don't find out they are not until they get a call from the student loan servicer.
Cosigners should contact students or the loan servicer regularly throughout the life of the loan to make sure payments are timely. Student loans usually cannot be dismissed into bankruptcy, and the cosigner could end up saddled with the debt.
If parents want to stay in control of a student loan until it is paid off, they should look into federal Parent PLUS loans. Parents with good credit are eligible for the loans, which have more flexible forbearance options than private student loans. While parents are obligated to pay back the loan, the trade off is they don't have to spend years worrying about whether the student is making payments on time.
If cosigning isn't an option for you, it is possible to get student loans without a cosigner.