Do parents have to co-sign student loans?

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Parents do not have to co-sign some student loans. But it could help a student get funding and even a lower rate. (Shutterstock)

If you take out a private student loan to pay for college, you may need a cosigner to help you qualify if you can’t meet a lender’s eligibility criteria. But if you’re using federal dollars to cover the cost of your education, you probably won’t need it.

Whether or not you have someone to co-sign, your first step should be to complete the Free Application for Federal Student Aid (FAFSA) to see if you qualify for federal student loans.

Here’s what you need to know if you’re a parent considering co-signing your child’s student loans.

Whether you are the borrower or the co-signer, Credible allows you compare private student loan rates from multiple lenders, all in one place.

Do parents have to co-sign student loans?

Parents do not have to co-sign student loans. Your child probably won’t need a co-signer for federal loans because most of them don’t require a credit check.

But since federal loans have a borrowing limit, your child may need to turn to private loans to fill in the funding gaps. When this happens, they may need a co-signer if they cannot meet a lender’s credit requirements on their own.

Benefits of student loan co-signing parents

Before you co-sign your child’s student loans, consider the pros and cons. Here are some benefits of co-signing your child’s student loans:

  • Improves chances of approval — If your child lacks a credit history or has bad credit, they’ll likely have a hard time qualifying for a private student loan without a co-signer. But if they apply with a cosigner who meets a lender’s eligibility criteria, it can help them get approved.
  • Potentially lower interest rate — Private student loan rates are often based on a person’s credit history. If you have good credit and co-sign your child’s student loan, it could help them get a lower interest rate.
  • You can be withdrawn from the loan before the end of the repayment term — You can be removed as a co-signer in two ways. Your child can take you out by refinancing the loan, or some lenders may allow the primary borrower to release a co-signer after making a number of one-time payments and meeting its borrowing needs. Each lender’s terms vary, so it’s a good idea to compare lenders before making a decision.
  • Can help your child build or improve credit — Payment history is the most important credit factor, accounting for 35% of your credit score. If your child pays off their student loan on time, it will add a positive payment history to their credit report. As a result, their credit score could increase.

Disadvantages of Parents Co-Signing Student Loans

While co-signing your child’s student loans can help them pay for their education, here are some potential risks you should keep in mind:

  • You are responsible for the loan if your child defaults — Co-signing a loan for someone makes you responsible for repaying the loan if the primary borrower can’t make their payments. So, if your child does not repay the loan, a lender will ask you to make the payments.
  • Could damage relationships — If your child can’t afford their monthly installments and you have to pay them, it can strain your relationship.
  • May affect your ability to qualify for funding — When you apply for financing, a lender will likely take into account the monthly student loan payments you co-signed to calculate your debt-to-income ratio (DTI). If your DTI ratio – your monthly debt to your gross monthly income – is high, it may be more difficult for you to qualify for other financial products.
  • Potential damage to your credit — If your co-signed loan is 30 days or more past due, a lender can report the late payment to the three major credit bureaus – Equifax, Experian and TransUnion. As a result, it can hurt your credit.

If you are considering co-signing a private student loan, visit Credible for compare private student loan rates from various lenders in minutes.

Alternatives to Co-Signing Parents for Student Loans

Several student loan options do not require a co-signer. To start, remember that most federal loans don’t require a co-signer. This means that a borrower’s eligibility is based on financial need, not credit history.

To check if your student is eligible for federal loans, they must complete the FAFSA. They must provide personal and financial information, such as their social security number, bank statements, W-2 forms, and federal tax returns.

If they are an independent student, they will only have to provide their personal and financial information. But if it is a dependent student, it will also need to include your same information. Your financial information will help determine the type of federal loan they may qualify for.

Once they submit the FAFSA, they may qualify for these types of federal loans:

  • Subsidized direct loans — These loans are available to undergraduate students who meet certain financial need requirements. The US Department of Education pays interest on subsidized loans while your student is in school, during deferment periods, and during their six-month grace period after graduation.
  • Unsubsidized Direct Loans — All undergraduate, graduate and professional students can qualify for these loans since eligibility is not based on financial need. A major drawback is that the student is responsible for accrued interest while in school.
  • Direct PLUS Loans — Two options, the Grad PLUS Loan and the Parent PLUS Loan, are available for graduate students, vocational students, and parents of dependent undergraduate students. These loans are subject to a credit investigation. But borrowers may still be able to qualify for a loan, even with a bad credit history.

Private student loans

Your child usually needs good credit to qualify for a private student loan on their own. But some lenders offer student loans without a co-signer. And it may be possible for them to qualify for a bad credit student loan.

If they apply for a private student loan with bad credit, keep in mind that they will likely be charged a higher interest rate. To increase their chances of approval and their chances of getting a low interest rate, consider adding yourself as a co-signer.

Is it better to get a parental loan or co-sign a student loan?

A Parent PLUS loan is a federal loan available to parents of undergraduate students. With this option, your name will be the only one on the loan. This means that you will be solely responsible for repaying the loan.

In contrast, co-signing a student loan means that your name and your child’s name will be on the loan. If your child can repay the loan on their own, you won’t have to make the payments. As a result, more of your hard-earned money can be spent on other goals, like retirement or a dream vacation.

That said, a Parent Loan PLUS is not necessarily better than a co-signed private student loan. The option that is best for your child may not be the best for you. You will need to determine which option is best for you based on your particular situation.

With Credible, you can compare private student loan rates without affecting your credit.

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