Should Parents Cosign Student Loans?
With the costs of higher education continuing to rise year after year, it’s only natural for parents to want to chip in and help with the cost. They can do this in a number of ways, the most popular of which is opening a 529 savings account and stashing away money as they can. However, parents can — and often do — take out loans to help their dependents get through undergraduate or graduate school.
Common borrowing options for parents include federal Parent PLUS loans, which come with fixed interest rates and are backed by the federal government. However, parents often co-sign on private student loans alongside their kids as well, often because college students lack the type of credit required to qualify on their own.
Unfortunately, there are often severe financial consequences that come into play when parents take out loans to pay for their children’s higher education. Many of the worst effects aren’t even the result of a default.
For example, a May 2022 study from The Century Foundation showed that borrowers with Parent PLUS loans whose kids graduated owed a median debt amount of $29,600 at last count. However, the average parent borrower still owed more than half of the initial balance (55%) ten years after their dependent graduated, followed by 38% of the original balance a full 20 years after they graduated.
“In other words, many parents spend more years paying off their Parent PLUS loans than the years they spent living with and raising the child whose education their loan supported,” noted Senior Policy Associate Peter Granville in an analysis of the study.
There can also be disastrous consequences for parents who cosign on private student loans with their kids — even when the kids agree they will be the ones making the payments once they graduate and start earning a real income. We have all heard the stories of college graduates who refuse to pay off their loans, thus leaving their parents entirely on the hook. Then there are situations no one can predict that put both the parents and the child in a financial bind when neither one expects it.
With all this in mind, you may be wondering if parents should get involved in borrowing for their children’s education. I asked several experts for their thoughts on this topic, and here’s what they said.
Risks For Parents Cosigning For Student Loans
Mark Kantrowitz, who is the author of “Who Graduates from College? Who Doesn’t?” and one of the top student loan experts in the nation, says that cosigning for a child’s student loan is akin to “giving your child the keys to your financial future.”
When you cosign, he says, the loan counts as if it is your own because you are co-borrower. This means you are equally obligated to repay the debt, just as the student is.
Kantrowitz adds that lenders seek payment from the student first, mostly as a courtesy.
“But, as soon as the student is late with a payment, they will require the cosigner to make payments,” he says.
If the student is ultimately late with a payment or defaults on their loans, it can ruin the credit of all parties on the loan, both the student and the parents. This is obviously a raw deal for parents since they may not know about late payments on student loans until after it happens and the damage is already done.
Michael Lux of The Student Loan Sherpa also adds that not everyone finishes college in the first place, and that others can’t find a job after graduation that pays enough to keep up with student loan bills. This can leave parents on the hook for full or partial payments for years, and all at a time when they are likely trying to save for their retirement or enjoy their golden years.
Then there are the unpredictable issues that can pop up, including disability or major health issues that can make it difficult or impossible for the new graduate to earn an income.
“Even if your child does everything right, if they are injured in an accident and unable to work, the parent may have to take over payments,” says Lux.
Bruce Hanson, who is an Education Wellness Expert and the founder of First Choice Admissions, also adds that it’s important to consider whether a child’s inability to repay the loan might damage the parent-child relationship.
“How much financial damage would this cause to your household?” he asks. “Imagine the conversations that this would trigger. Would your relationship survive it?”
Hanson says that his own parents chipped in to help him get through his program at Wharton, and that they had a much better relationship once the loans were paid back.
Ultimately, he says that you need to have an uncomfortable conversation with your child now so you both understand all the possible outcomes and are confident you can weather them together.
If that kind of conversation seems impossible, that’s a good sign cosigning on student loans is a really bad idea.
Paying For College Without Cosigning
Kanrtowitz says that taking out Parent PLUS loans can be advantageous to cosigning on a student loan since the parent is the only borrower listed and they can make sure all payments are made on time.
The parent can then execute an agreement with their child for the child to send the payments to the parent, he says. “This should be a formal agreement, a contract, so that there’s no question about the parent loan being a gift.”
It’s also smart to make sure the student is exhausting all efforts at finding free money for college first. For example, Kantrowitz recommends searching for scholarships using a free scholarship matching website like Fastweb.com or the College Board’s Big Future.
That said, families should start the process of finding money for college by filling out the Free Application for Federal Student Aid (FAFSA). Filing this form lets every family know what type of student aid they may be eligible for, including federal student loans.
Speaking of that, parents should also make sure their child borrows using federal student loans in their own name first. After all, federal student loans come with fixed interest rates and are eligible for income-driven repayment plans and federal protections like deferment and forbearance.
Of course, federal student loans do have strict borrowing limits, which borrowers can easily max out. However, Kantrowitz points out that hitting these borrowing limits is a good reason to stop and think about what you’re doing before borrowing more.
“If the student needs more money, it may be a sign that they are borrowing too much and should enroll in a lower-cost college or economize in other ways,” he says.