While federal student loans can be an affordable financing option for college, students can quickly hit the annual and aggregate borrowing limits.
The College Board reported that the average cost of attendance for the 2019-2020 academic year at an in-state public four-year school was $26,590, and $53,980 at a private university. Considering that first-year dependent students can only borrow up to $5,500 per year in federal Direct subsidized or unsubsidized loans, they’ll likely need to find other financing options to pay for the rest of their education.
Private loans can cover the rest of your child’s education expenses, but they may not qualify for a loan on their own if they don’t have good credit. Cosigning a loan with them can be a great way to help them pay for college, but you may be worried about taking on that responsibility.
Here’s everything you should know about cosigning for a family member before signing your name on the dotted line on the loan application.
Federal PLUS Loans vs. Private Student Loans
If you want to help your child with their college expenses, you have two main options:
- Take out a federal Parent PLUS Loan
- Cosign a private loan
You and your child should always fill out the Free Application for Federal Student Aid (FAFSA), even if you don’t think you’ll qualify for financial aid. The FAFSA isn’t just for student loans; it’s what the government, states, and colleges use to evaluate applications for grants, scholarships, and institutional aid.
Parent PLUS Loan
If your child has maxed out their Direct subsidized and unsubsidized loans and needs more money to pay for school, one option is to take out a federal Parent PLUS Loan. As a parent borrower, you can take out up to the total cost of attendance in PLUS loans to pay for your child’s undergraduate education.
However, Parent PLUS Loans do require borrowers to undergo a credit check. PLUS Loans have fixed interest rates that are the same for all borrowers, regardless of your credit and income. Federal PLUS Loans have the highest interest rates of all federal loans; for loans issued between July 1, 2020, and July 1, 2021, the interest rate on PLUS Loans is 5.3%. And, PLUS Loans have a 4.236% disbursement fee.
With a Parent PLUS Loan, you are the borrower — not your child. That means you are solely responsible for making payments on the loan.
Cosign private loans
If you have a strong credit score, you and your child may qualify for a lower rate than you’d get with Parent PLUS Loans by working with private lenders.
With Earnest, you can also borrow up to 100% of the school’s certified cost of attendance. We don’t charge origination, application, or disbursement fees, making cosigning a private student loan a potentially more cost-effective option than federal loans.
At Earnest, you may also have more repayment options than you would with federal loans. Instead of the standard 10-year repayment plan you’d have with Parent PLUS Loans, you can choose a loan term as long as 15 years, giving you a more affordable monthly payment.
The Pros of Cosigning
Being a student loan cosigner for your child has several advantages:
- You improve your child’s chances of getting a loan: Private lenders usually have a minimum income, debt-to-income ratio, and/or credit requirements. As a college student, your child is unlikely to meet those requirements on their own. By acting as a cosigner, you increase their odds of qualifying for a loan.
- You can help your child secure a lower rate: By adding a cosigner to their application, your child can qualify for a lower interest rate on a loan and save money over time in loan payments.
- Your child could qualify for a larger loan: While there are private lenders that offer non-cosigned loans, they tend to have lower loan maximums. By cosigning, you ensure your child gets the full amount they need to pay for school.
- Your child can build credit: By helping your child secure a loan, they can start building their credit history. As they make payments, the lender will report their payment activity to the major credit bureaus. Over time, the loan can improve their credit score.
The Cons of Cosigning
While cosigning a loan can be a big help to your child, there are some downsides to keep in mind:
- You are responsible for payments: As a cosigner, you’re responsible for making payments if the primary borrower falls behind. If your child fails to keep up with the monthly payments, you’ll have to make them, instead.
- Your credit score could be affected: If your child stops making payments and you’re unaware that they’re delinquent, your credit score could be damaged, and the account could be sent into collections.
- The loan could affect your ability to qualify for other forms of credit: If you intend to apply for other types of credit, such a home mortgage or car loan, cosigning a student loan could increase your debt-to-income (DTI). With a higher DTI, you may not qualify for other lines of credit.
- Not all lenders offer cosigner releases: While some private student loan lenders offer cosigner releases, not all do. You may have to remain as a cosigner for the length of the repayment term, or until the loan is paid off.
While you may want to help your child with their college expenses, you have to consider the financial risks you’d take on before cosigning a student loan application. Have an open and honest conversation with your child about the benefits and risks, and how much responsibility loans are before submitting a loan application.
If you cosigned a loan and your lender doesn’t offer a cosigner release, one way to remove yourself from the loan is to ask your child to refinance the student loan after graduation. If your child refinances the loan as an individual and is approved on their own, you’ll no longer be a cosigner on the debt, and the loan will be solely in their name.