Co-signing a student loan is a great way to help your child pay for college, but it’s not always the right decision. Here are some reasons why you may want to consider co-signing your child’s loan.
Who Can Cosign a Loan?
You must be a US citizen or permanent resident. You also need a good credit history, which means no recent bankruptcies or late payments in the last two years. You’ll need to be at least 18 years old (or 21 if you’re cosigning a private loan), and you must have a steady income that can support your student loan monthly payments.
You’ll also need to pass an underwriting process before being approved as a cosigner on any student loans. This includes providing proof of income, employment history and other documentation that shows you’ve been financially responsible in the past.
How to Decide Whether you Should Co-sign a Loan
When considering co-signing a student loan, it’s important to understand the loan terms. Are you comfortable with the terms of the loan? Will you be able to pay if your child does not? Once you have answered these questions, consider how much the loan is and the student loan interest rate. As per the experts at Lantern by SoFi, “Some people have a cosigner to obtain the best possible terms.”
Reduce your child’s cost of borrowing
If your child has a good credit score, there are three benefits to cosigning a student loan:
- Lower interest rate. A cosigner makes the student eligible for a lower interest rate on their loan.
- Lower monthly payments. If the student’s income is low, he or she may not be able to afford the monthly payment required by his or her bank. You can help him or her pay that additional amount each month to secure a lower interest rate and keep their overall cost of borrowing down.
- Lower total cost of borrowing. In addition to lowering your child’s monthly payments, as an alternative way of reducing their total borrowing costs, you can choose an option that allows them to pay back less than what they owe over time (this is called Graduated Repayment).
Help your child build credit
Building credit is important for future loans and employment, so helping your child establish and build their own credit history can be a valuable asset in the future. If you cosign with them, they will have access to the same benefits you do: lower rates on future loan payments and better terms when it comes time to refinance or sell their home.
You’ll be able to help guide them in making responsible financial decisions. If you’re worried about your child making risky choices when it comes time for them to pay back loans on their own, cosigning lets you help guide them toward responsible spending choices that won’t damage their financial health in the long run.
In the end, cosigning a student loan is an important decision to make. If you decide to do it, it’s best to make sure that you understand the terms of the loan and know what you’re getting into. Your child may be able to get approved for a lower interest rate with your help, but they’ll have to pay back every penny! And if they decide not to go back or drop out before graduation day? You might just have some explaining to do when their student loans come due…