Pros and Cons of Co-Signing a Private Student Loan

Since many college students haven’t established a credit history, having a parent co-sign is a fairly common practice. However, adding a co-signer to a loan has advantages and disadvantages for both the parent and the student.

Pros

• Higher chance of approval
• Potential for better loan terms
• Shared responsibility

Cons

• Potential for conflict
• Parents could be made responsible for debt
• Impact on parent’s credit

Pros Explained

• Higher chance of approval: Having a co-signer can help students with limited credit history borrow the money they need to pay for college.
• Potential for better loan terms: Having a co-signer can mean qualifying for lower interest rates, which could lead to considerable financial savings over time.
• Sharing responsibility: Parents who co-sign with their student can ensure shared responsibility for repayment, which they wouldn’t have if they took out federal parent PLUS loans instead.

Cons Explained

• Potential for conflict: Borrowing with someone else could easily lead to issues if the parties don’t agree on who will make payments on the loan.
• Parents could be made responsible for debt: If a student doesn’t repay their student debt, even if they initially agreed to do so, this could leave parents fully responsible for repayment if they want to protect their credit score.
• Impact on parent’s credit: Late payments on private student loans can impact the credit scores of both parents and students. The loan will also appear on the parent’s credit reports, which could impact their ability to borrow for other reasons.

Parental Financial Responsibility

There are no hard and fast rules when it comes to paying for higher education or sharing expenses. Some parents will want to help pay for school, either through saving for college with a 529 savings plan; covering tuition and fees out of pocket; or borrowing for school with federal student loans, private loans, or both.

Parents and students should discuss their expectations and ways they can both work toward a common goal of paying for a college education.

Legal Considerations

For federal student loans, legal consequences for nonpayment are the same for both students and parents who take out parent PLUS loans. For example, late payments can be reported to the credit bureaus and will lower the borrower’s credit score. The government can also collect on unpaid student loans through wage garnishment and seizure of tax refunds or government benefits checks

Legal considerations for private student loans are the same. Private lenders may even sell your unpaid debt to a collection agency, and they may also try to take you to court.

Who Qualifies for the FAFSA?

Any student can fill out the Free Application for Federal Student Aid (FAFSA), which unlocks a range of financial aid options like scholarships, grants, work-study programs, and federal student loans. Both students and their parents need to include their financial and tax information on the FAFSA form, even if the parent doesn’t plan to help with college expenses.

What Are the Interest Rates of a Direct PLUS Loan?

Interest rates for federal student loans are always fixed, but they do change for new loans originated from one year to the next. For direct loans disbursed on or after July 1, 2023, and before July 1, 2024, the rate for direct subsidized loans and direct unsubsidized loans (undergraduate) is 5.50%. For direct unsubsidized loans for graduate/professional students, the rate is 7.05%, and direct PLUS loans come with a fixed interest rate of 8.05%.

How Can I Take My Parents Off My Student Loans?

If your parent co-signed a private student loan, you can have their name removed by refinancing the loan on your own, if you can get approved.

Some student loans also allow for a “co-signer release,” which lets students release a co-signer of their financial responsibility for the debt after a set period of time.

The Bottom Line

Parents may or may not be on the hook for repaying student loans. It all depends on the loan type taken out and who ultimately signed the paperwork to borrow money. If a parent takes out a parent PLUS loan or co-signs on a private student loan, however, they’re legally responsible for repayment no matter how long it takes.

This is why families should have a plan when it comes to paying for college and repaying any resultant debt. Whether parents want to help cover the cost or believe their child should pay for college on their own, the sooner this important discussion takes place, the better.