When Rachel Ramsey Cruze, daughter of anti-debt guru Dave Ramsey, was a senior at her Tennessee high school, she told her parents that she wanted to attend Auburn University (in Alabama) because her friends were going there. Does this conversation with a college-bound teen sound familiar?
Cruze's parents sat her down and said they would not pay almost double the price of University of Tennessee for her to cross the state line. They showed her the cost differences and said that if she wanted to go to Auburn, she could pay the difference herself.
"That opened my eyes," says Cruze. "I didn't want to pay $18,000 more per year myself, so I went to the University of Tennessee and now see how smart that was."
Not every parent has a similar discussion about college costs with their children. Some parents may even cosign the student loans necessary for a higher-priced education. But if that money turns out to be a poor investment, it can lead to headaches for students and parents alike.
Why do parents have to cosign for student loans?
Statistics from the Institute for College Access and Success, show that in 2016, graduates from four-year colleges had debt ranging from $20,000 to $36,350.
"Student loan debt is largely unavoidable if parents cannot afford to pay for all college costs," says Mark Kantrowitz, publisher of Edvisors.com, a suite of college-planning websites. "So the trick is to minimize this debt. Show your child that every dollar borrowed costs $2 to pay back and how long it takes to pay it back."
Both Kantrowitz and Cruze stress that the primary purpose of college is to earn a degree that leads to a higher-paying job as soon as possible.
What are the responsibilities of a cosigner of a loan?
Regardless whether you cosign for a student loan, personal loan, or any other loan, as a cosigner, you are just as responsible for loan repayment as the primary borrower. This means that you must ensure that the loan is repaid:
- On time
- In full
Why do parents have to cosign for student loans?
If the borrower fails to meet his or her obligation, then cosigners must meet the obligation for them.
"Living it up or studying toward an impractical major for four years on borrowed money is not the lesson to teach your student," says Cruze. Both say that going to a high-price school is unnecessary for all but a few students, although opinions vary on the value of "well-branded" educations.
Cosigning a student loan: pros and cons
On the positive side: Many parents want their children to attend the best possible college and are willing to cosign student loans or take out personal loans to make that happen. The belief may be that if the student graduates from a well-known college or university, he or she may have access to an alumni network and/or have an easier time obtaining job interviews than a comparable student who graduates from a less selective school.
On the negative side: If you are wondering, "How is a co signer's credit affected?" The answer is that while your existing credit should not be impacted when you cosign a loan, you are responsible for that debt so your credit score might be negatively impacted while the loan is outstanding. This could make it more difficult or more costly for you to obtain another personal loan, auto loan or mortgage until the student debt is resolved.
How does cosigning a student loan affect my credit?
If you are considering cosigning a loan that allows your child to attend a higher-priced school, or thinking about taking out a personal loan yourself to fund your student's education, first consider these four warning signs to avoid risk related to shouldering the burden yourself and potentially having harm done to your credit.
1. Poor academics in high school
Because some states now offer lottery-funded scholarship awards for students who meet certain academic requirements, admissions at many less-expensive state colleges have gotten much more competitive. But if your student is ineligible because he or she doesn't meet those requirements, opting for a pricier private school that accepts lower academic standards may be a poor choice.
"Community college is the way to improve academics for students who don't meet four-year state college requirements," says Cruze.
2. Questionable future earnings
Kantrowitz offers this simple formula for determining how long it may take students to pay off their loans: If total student loan debt at graduation is less than the potential annual starting salary, loan repayment might be possible in 10 years or less. For larger loan amounts, repayment times can be significantly longer.
If the career's potential salary pales in comparison to the extra educational costs, borrowing more money may be a questionable option.
3. The need to consider personal loans
Direct subsidized student loans from the U.S. Department of Education come with low interest rates and can often cover most in-state college costs, particularly if the student is able to secure other grants or scholarships. But if your child's educational bills force you to consider additional personal loans that have less-attractive terms than a direct subsidized loan, think carefully before choosing this route.
"Students never have to borrow all they are offered, especially if parents can pay some costs," says Kantrowitz. If you are forced to consider:
- Borrowing from the Federal Parent PLUS loan program
- Cosigning for a direct unsubsidized or private student loan at higher rates
- Taking out a personal loan or multiple personal loans
The additional costs these loans impose may not be worth it.
4. Uncertainty about completing education
A four-year college is not for everyone. Poor grades or a decision to drop out or transfer schools may result in a loss of paid-for credits, which can substantially increase college costs, says Kantrowitz. Some students are more inclined toward career paths that favor a technical certificate or two-year associate degree.
"Don't take a year off to save money," Kantrowitz says. "It's better to complete the degree to get to that higher-paying job quicker."
Can I be removed as a cosigner on a student loan?
Parents often think that cosigning simply means they are helping their child get a loan, but as discussed above, a cosigner is equally obligated to repay the debt if there is a default. The only way to be "removed" as a cosigner is if:
- The loan is paid in full by the borrower or cosigner
- The original loan is refinanced or consolidated by the borrower without a parent cosigner.
- The borrower takes a new student loan or personal loan out to pay off the original loan.
"Parents need to protect their own credit," says Kantrowitz. "Realize that 'cosign' means 'your loan,' which can use up your own credit resources. Also, I never advise even considering a home refinance, using credit cards or borrowing from retirement savings to pay for college."
Because they are the ones who will sign the checks, parents ultimately have control over how much they'll help their children, says Cruze.
"Think long term," she says. "When your student graduates and gets their first job, and may be considering a mortgage loan, they will be so thankful not to be burdened with payments for student debt that might have been avoided by working hard and taking the least expensive route through college."