Your child is going off to college, a momentous and exciting day. That is, until you figure out how to pay for it. If your child is considering taking out a student loan, but doesn’t have the credit score to pull it off, sometimes a parent might cosign for the loan to help them acquire it.
However, cosigning a loan for your child ties you to that loan in ways you may not want. Before you jump into such a big financial gesture, here are some important questions you should ask, according to experts.
Is it a private or federal loan?
Before agreeing to cosign a loan for your child, it’s important to understand the risks and responsibilities involved, said Max Benz, founder and CEO at BankingGeek.
“One of the first questions to ask is whether the loan will be a private or federal loan. Federal loans offer certain protections, such as the ability to defer payments if the borrower becomes unemployed. Private loans do not have these same protections, so it is important to make sure that the borrower will be able to make the payments on time.”
Does the loan have a fixed or variable interest rate?
Another important question to ask is whether the loan has a fixed or variable interest rate, Benz said. “Variable interest rates can increase over time, which can make it difficult for the borrower to keep up with payments.”
Fixed rates, on the other hand, give you a reliable, unchanging interest rate you can bank on, with no surprises.
Have you considered federal loans and grants?
Don’t cosign any student loan before you make sure that there aren’t better options out there, said Melanie Hanson, Senior Editor at Hyperlynxmedia. “Specifically, I’m referring to the FAFSA, (Free Application for Federal Student Aid). This master application is something that every college student should fill out to get access to Pell grants and [Federal] student loans,” she said.
Federally-backed student loans have the best available interest rates and the most-forgiving repayment policies. “If you’re about to cosign a loan for your child, make sure it’s the best loan they can get before proceeding.”
Do you know your credit score?
“Though it is your child who’s using the loan funds, don’t forget that when you cosign on any type of loan, the lender checks your credit for approval,” said Carter Seuthe, CEO of Credit Summit Consolidation. “You want to make sure your credit score is up to snuff.”
Additionally, he warned, “Parents should ask if getting their credit checked will impact their score, because sometimes credit checks can hurt a person’s credit score.”
What are the interest rates and late fees?
Parents should also ask what the interest rates and late fees are, said Seuthe. “If the student is late on their payments, the parents are financially responsible for paying back the loan since they are the cosigners.”
Seuthe added that you should find out what late fees are in case your child is not timely with payments and then find a way to avoid further late fees.
What happens if your child fails to pay?
While cosigning a loan may be necessary to help your child qualify for a student loan, it has its risks, according to Lucia Jensen, CEO of WeLoans. “The biggest risk comes in case your child fails to pay for their loan … the burden falls on you to pay for that loan as the cosigner.”
You want to really consider this risk to your own financial situation, she urged, especially if you’re already retired or looking to retire soon and have limited funds.
What is the loan interest now and in the future?
If you have taken out a variable interest rate loan, you’ll want to know what kinds of fluctuations you can expect, said Jensen. “Interest rates are continually going up and down. You should be ready for this situation. Get to know the interest rates so that you can know how much is expected to be paid back.”
What are the loan repayment terms?
Repayment options can vary, and it’s necessary to know the payment term length, according to Sara Graves, founder of USTitleLoans. “As a cosigner, you should know when a payment is considered late and events that can lead to a student loan default. Usually, a private loan is in default after 120 days of non-payment. Hence, you’ll want to know if the lender has any leeway with payments like an unemployment forbearance. Also, look at the annual percentage rate (APR), interest and additional fees.”
Is there a cosigner release?
Some student loan lenders will offer a cosigner release, which means that after approval, the cosigner can be removed after the student meets certain qualifications set by the lender, according to Mila Garcia, co-founder of iPaydayLoans.com.
“In this respect, you should not sign the loan until you have confirmed that the student loan comes with a cosigner release, because this is what will ensure that you are not held equally responsible for the lifetime of the loan. Plus, if the student plays it smart, they can even utilize a cosigner to improve their chances of getting approved with a lower rate before going off on their own.”
Will you be able to get out of the agreement?
Even with a release clause, Graves warned, “It might not be possible to be freed from financial responsibility until the student has met specific requirements, usually 24 to 36 consecutive, on-time payments.”
For lenders that don’t offer a cosigner release, the student will have to refinance the loan to be able to remove you as a cosigner, which can be a hassle. “Before cosigning a loan, seek a cosigner release and contact the lender for more information and the creation of a plan.”
What does the loan collections process look like?
Though you really hope that your child will not default on their loan, especially if you’re cosigning, it’s important to know what the exact terms of repayment look like, said Jake Hill, CEO of DebtHammer. “You need to understand what action they can take against you to collect. Also know what’s legal and not legal. Aggressive collectors will claim they can garnish your wages or put a lien on your property and this is incredibly illegal.”
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