One question is bound to pop up as college students head to campus: “Hey, Mom, would you co-sign for a student loan?”
And too often that knee-jerk reaction is “Sure, why not?” Parents and grandparents feel they should help out when it comes to getting a college diploma and contribute to building up all that college debt.
“There’s no boxed warning label that says co-signing a student loan may be hazardous to your wealth,” said Mark Kantrowitz, a college debt expert and senior vice president and publisher for Edvisors.com.
OK, but maybe there should be.
“On this loan, you’re giving them the keys to your car,” Kantrowitz said. “You’re giving them the ability to ruin your credit.”
For the student, getting a co-signer increases the chance of being approved for a private student loan. The borrower typically would qualify for a lower rate. Loan rates on private student loans vary based on credit history.
But co-signing is nothing as simple as offering a reference. It can mean the parent or grandparent is on the hook if the student defaults. Co-signing puts your credit score at risk if the student makes late payments or falls behind.
We all have great faith in our children, but it’s possible they won’t get a job right away or even complete college.
Katie Moore, financial counselor at GreenPath Debt Solutions in Detroit, said sometimes students take on so much debt that they’re truly unable to repay it. She met one aunt who took on a good deal of debt for a nephew and then was not in contact with the student. She had no idea that the student loans were not being repaid.
“She actually thought he was repaying them until she got the calls,” Moore said.
The aunt now faces the burden of those student loans, along with her own financial hardship after a layoff. Another point: Student loan debt typically cannot be discharged in bankruptcy.
Some points parents – and, yes, grandparents – need to consider before co-signing for a high-cost private student loan:
• Did the college student first apply for federal student loans?
Federal student loans do not require a cosigner. About 90 percent of private student loans were cosigned in 2011, according to the Consumer Financial Protection Bureau. That’s up from 67 percent in 2008.
Federal Stafford Loans for undergraduate students will have a fixed rate of 4.66 percent if the loan is taken out between July 1 and June 30, 2015. Federal Stafford Loans for graduate students will have a fixed rate of 6.21 percent.
Interest rates are fixed for the life of new federal student loans, but as students borrow more each year, they’re facing new loans that could have a different fixed rate.
Kantrowitz is forecasting that next academic year the new undergraduate Federal Stafford Loan rate could be 5.5 percent and the graduate Federal Stafford Loan rate could be 7 percent.
• Did the parent look into the federal PLUS loan?
Federal Grad PLUS and Federal Parent PLUS Loans are at 7.21 percent for loans taken out July 1 through June 30, 2015.
One potential drawback is that a parent with a bad credit history cannot take out a Parent PLUS Loan on his or her own. Expect a credit check.
If you have a bad credit history, you might still be able to take out a PLUS loan if you get an endorser who has a better credit history. But the endorser is someone who agrees to repay the loan if you do not. The endorser could be another relative, maybe the student’s aunt or grandparent. But the endorser may not be the student who needs the loan.
Stepparents can borrow for the PLUS loan only for as long as they are married to a biological or adoptive parent, unless they have adopted the student.