Why You May Not Cosign Your Child’s Student Loan
Do you see it as your responsibility to cosign your child’s student loan? The need to cosign your child’s student loan may seem like an urgent and compulsory thing to do. But you need to sit down and count the cost first. Actually cosigning a student loan is fast becoming a norm in America. Why this is common is that, it is very difficult for student to obtain private student loans without having someone to cosign the loan for them. Most students don’t have the kind of credit score that lenders will require neither do they have collateral to put down as security for the loan. They may not even have any proof of income which can help them repay the loan. Since no lender wants to take unnecessary risk, hence the need for cosigner. Of course, the cosigner is supposed to be able to cover for the deficiency of the student. Therefore, the person who will act as a cosigner will be expected to have good credit score.
The effects of cosigning a student loan is that it makes the student to gain access to a loan which he doesn’t have the credibility to get in his own capacity. At the same time, he may be able to get the loan at a good rate. On the other hand, cosigning places repayment responsibility on the cosigner. That is, if the student defaults in payment, the lender will go after the cosigner. If by any reason that the borrower dies, the loan will enter auto default. In addition, if you cosign your child’s student loan, the loan will also appear on your credit report as if you are the borrower. This will increase your debt to income ratio. This may make it difficult for you to get a new credit or loan. Missed payment or default will also affect your credit score.
Read Also: Pros & Cons of Cosigning Student Loans
So, must you cosign your child’s student loan? The decision is absolutely yours. However, there are certain situations when saying “No” to your child’s request may be the best thing to do. This may be a difficult thing to do as your child may not understand you. He may even see you as a wicked parent who doesn’t care about the career of his child. This notwithstanding, if he doesn’t understand you now, he will understand the reason you needed to take such hard decision in the future. Nevertheless, you should try as much as possible to explain to your child why you decline cosigning his student loan. So, let’s look at the instances when you may not cosign your child’s student loan.
When Not to Cosign Your Child’s Student Loan
Bad Credit Score: Private lenders will require that borrowers have good credit score. In a situation that the borrower’s credit is not good enough, the borrower will need somebody with a good credit score to cosign his loan. So, if your credit score is bad as a parent, you will not be in a position to cosign your child’s student loan. It does not matter your good intention, lender will not allow you. This should not be difficult for you to explain to your child. He can easily understand this.
You can’t afford the payment: You should not cosign your child’s student loan if you know you will not be able to pay the loan in case of default. When you cosign a loan, it means that you agree to pay back the loan if the original borrower can’t pay. Parents usually cosign their children’s student loans with the expectation that when the child graduates, he will get a good job. By this, he will be able to pay back the loan. But with the situation in the labour market, some may not be able to get a job immediately. This automatically places the responsibility of repaying the student loan on the cosigner. The situation is even worse if the borrower dies. The loan will enter auto-default. If you have the money, it will be better to buy term life insurance for the child in case you cosign his student loan. But if you know that your income will not be able to absorb the repayment of the loan or that the repayment will throw you off balance, it is better you decline cosigning your kid’s student loan.
You intend to get mortgage loan: If you are planning to apply for mortgage loan, cosigning your child’s student loan may not be the right thing to do especially if it will increase your debt to income significantly. Apart from having a good credit score, one of the factors that mortgage lenders will check before approving your application is your debt to income ratio. If it is too high or it is above the required benchmark, you may find it difficult to get the mortgage.
You may then ask, if you refuse to cosign your child’s student loan, does it mean that he will not be able to further his career? Saying “No” to cosigning your child’s student loan may not mean that he will not be able to further his education. You can suggest to him the other alternatives that are open to him. It is possible that he has not even considered any alternative. So what are the alternatives? These are discussed below:
Read Also: Why Lender May Deny Cosigner Release
- Consider less expensive school: Private schools are damn too expensive these days. For this reason, you may advise your child to consider public schools. Public schools are quite cheaper than private schools. At times, paying high tuition fees does not mean that you are getting better education than people that attend public schools. Some private schools charge very high school fees so that they can cover their huge overhead. Also, because private schools are essentially profit-oriented, the founders like to maximize their returns in order to recoup their investment as fast as possible.
- Savings: You can encourage your child to work for some time in order to have some savings which can be used to finance his education. Even if the savings is not enough, the student loans that he will require to complete his education will not be that much again. Possibly, you may even be able to cosign the loan at that point as your income may be able to support the repayment.
- Scholarships: There are many organisations that usually offer scholarships to students in specific courses of studies. The good thing about scholarships is that, the money is free. That is, unlike student loans, the student will not be required to pay back the loan. You can encourage your child to go on the internet to search for available scholarships. This is not a difficult thing to do. But he should beware of scammers.