As children, we never truly realize how much our parents are sacrificing for us. The late hours they work, the money they spend, and the time they take to help us are just a part of life. It’s not until we approach adulthood that all those sacrifices start to have more meaning.
One way that parents take care of their children is by cosigning for their student loans. When a child takes out their student loans at 17 or 18, having a parent attached to the loan seems natural. By the time students start paying those loans off in their twenties, they’re more able to understand exactly what kind of gift their parents gave them.
If you’re currently repaying student loans your parents cosigned, chances are you want to do everything possible to maintain their good credit standing. Here’s what you need to take into account and how you can protect them.
Why Parents Cosign for Student Loans
There’s a very good reason why so many parents decide to cosign on student loans—most private lenders require a cosigner if the borrower doesn’t have a credit history or viable source of income. In 2011, 90 percent of private student loans had a co-signer.
Federal student loans don’t require a cosigner, even if the main applicant has no credit history or proof of income. When parents fill out the Free Application for Federal Student Aid (FAFSA), they’re just providing information that will help their child qualify for scholarships, grants or federal student loans. The FAFSA isn’t a cosigning agreement in any way, contrary to popular belief.
Only students with a solid credit history will find themselves eligible for private student loans without cosigners. As it’s nearly impossible to build credit before turning 18, only older students tend to fit in this category.
For many students, relying entirely on federal loans just isn’t a viable option. The federal government limits students loans to $31,000 total for undergraduate dependent students and $57,000 for independent students. Unfortunately, that figure often doesn’t cover all the costs of attendance.
The average annual cost of tuition is $9,970 for in-state students at public universities, $25,620 for out-of-state students at public universities and $34,740 for private universities. For that reason, it’s not uncommon for students to need more than the federal max. Using a cosigner is the only way for some students to afford college once they’ve maxed out their federal loans and scholarships.
How Cosigning Helps the Borrower
Not only does cosigning give borrowers access to loans they might not have qualified for otherwise, they also get a lower interest rate.
That could mean thousands or even tens of thousands of dollars in interest saved over the life of the loan—no small amount for a recent graduate trying to build a financially secure future. For parents trying to give their children as many advantages as possible, cosigning is a low-cost way to give them a leg up.
How it Affects the Cosigner’s Credit
Cosigning means both the original borrower and the cosigner share an equal obligation to the lender. When a person cosigns on a loan, it automatically becomes part of their credit report just the same as if they signed up for the loan themselves. Creditors don’t look at cosigned loans any differently than other loans, because the cosigner could take over responsibility for the loan at any point.
It’s true that students who default or miss payments on a student loan will negatively affect their parent’s credit, but it’s also true that responsibly repaying a cosigned loan will actually help the cosigner’s credit. In other words, the risk of cosigning on a loan has little to do with cosigning itself, and everything to do with how trustworthy the borrower is.
Unfortunately, some lenders require that a cosigner take over a loan if the borrower passes away before the debt is repaid. Every lender has their own policy of what to do if the original borrower is no longer alive, so review your terms and conditions carefully.
What Children Can Do
When a child takes out a private student loan with a parent as cosigner, they’re taking on responsibility for that parent’s credit. This is a great opportunity for the child to prove to their parents how they can be a responsible adult now that they’ve left the nest.
To limit their exposure and gain financial independence, the child can ask the lender for a cosigner release form after certain requirements have been met. A cosigner release form removes the cosigner from any further responsibility to the loan. Many lenders, including CommonBond, have this option so parents can take themselves off of loans when their children are ready.
To be eligible for cosigner release, the following is usually required:
- A certain amount of payments: Before releasing the cosigner, the borrower needs to make a minimum amount of payments to be eligible. CommonBond only requires 24 months of consecutive payments, but some lenders require more.
- Completed degree: The borrower usually needs to have graduated before the lender will release the cosigner. This is because a borrower with a finished degree has a better chance of being employed, earning a higher salary, and being able to handle the loans by themselves.
- Their own financial profile: A borrower who wants to release their cosigner needs to be financially stable. That includes having their own solid credit history, proof of income and no red flags.
Unfortunately, not every lender provides the option of cosigner release for borrowers. In that case, the borrower may be able to refinance their loan without a cosigner.
Refinancing is when a borrower take out a single new loan to replace their existing loans. Usually people refinance to get a better interest rate or loan terms. In this case, the borrower would refinance to get a loan by themselves without a cosigner.
If the borrower doesn’t qualify for refinancing or a cosigner release form, there are still some ways they can protect the cosigner from any negative effects. First, the borrower should make every payment on or before the due date. On-time payments encompass 35 percent of a credit score and are the biggest single factor that determines one.
The easiest way to stay on top of payments is to establish auto-pay. Auto-pay allows the lender access to your bank account in order to automatically deduct payments every month. By using auto-pay, you eliminate the risk of forgetting to make a payment manually.
Borrowers should still check in every month to ensure that a payment has been made. It’s always the borrower’s responsibility to check that payments have gone through without issue, even if the site has a error processing payments. If you spot a mistake, call the lender.
Make recurring calendar reminders in your phone or on your computer to check on your payments. Every loan payment matters when it comes to establishing a strong credit history, so it’s important to be consistent.
Having your parents cosign on your loans can help you get a degree and teach you how to manage loans appropriately. Use your parents as a resource if you have questions and be honest if you’re having trouble making payments. Managing your student loans with a cosigner is simple if you stay on top of payments.