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Spring is in the air! The tulips are blooming, college acceptance letters are zooming into email inboxes, and the majority of parents with college-bound students<\/a> are panicking about paying for their kid\u2019s schooling.<\/p>\n Ain\u2019t this time of year grand?<\/p>\n There\u2019s a lot that families can do to tame the cost of higher education, starting with filing the Free Application for Federal Student Aid (FAFSA)<\/a> which determines a student\u2019s eligibility for federal aid, applying for scholarships and grants which don\u2019t need to be repaid, and considering the cost of attendance when comparing college acceptance offers.<\/p>\n But for some college students, there is a funding gap between their federal student aid\u2013which includes federal student loans\u2013and their total cost of attendance. If students or their parents can\u2019t afford to pay the difference out of pocket, just over 9%<\/a> turn to private student loans. And among undergraduate students, 92.45% of those private student loans are cosigned<\/a>\u2013often by Mom or Dad.<\/p>\n Unfortunately, cosigning your kid\u2019s private student loan can put your credit score, your retirement, and even your relationship with your child at risk.<\/p>\n Here\u2019s what you need to know about the unexamined dangers of cosigning your child\u2019s private student loan.<\/p>\n There are 42.8 million federal student loan borrowers<\/a> who owe a total loan balance of $1.693 trillion, which represents 90.9% of all student loan debt. Private student loans make up only 9.13% of all student loan debt, for a total loan balance of $133.4 billion.<\/p>\n There\u2019s an excellent reason why most student loan debt is federal: borrowers do not need to meet credit or income requirements<\/a> to qualify for federal student loans. Additionally, interest rates on federal loans are set by Congress<\/a> and are the same for every cohort of borrowers. The government also offers guaranteed benefits<\/a>, such as income-driven repayment plans, potential loan forgiveness, and forbearance options.<\/p>\n Unfortunately, 10.3% of student borrowers<\/a> default on their loans within the first three years of repayment, and an average of 6.24% of student loan debt is in default at any given time.<\/p>\n While the professional number crunchers haven\u2019t teased out precisely how many of these defaulted loans are federal and how many are private, it\u2019s safe to assume that there are a non-zero number of private, cosigned student loans going into default every year.<\/p>\n If you and your student have exhausted your federal student aid options, including scholarships, grants, federal student loans, and work-study programs, and you still have a funding gap, there are generally two loan options left.<\/p>\n A federal Parent PLUS loan<\/a> allows the parent of a dependent undergraduate student to borrow up to the cost of attendance, minus any other federal student aid your student has received, on the student\u2019s behalf.<\/p>\n Like your student\u2019s federal loans, PLUS loans offer multiple repayment options and allow for deferment and forbearance, although there is no path to loan forgiveness. You also cannot transfer your PLUS loan to the student you took it out for.<\/p>\n You must not have an adverse credit history to qualify for a PLUS loan, even though this loan doesn\u2019t require the same kind of credit check a traditional private loan uses to determine your interest rate. So it\u2019s possible to be denied a PLUS loan, although there are workarounds\u2013you may be able to explain the extenuating circumstances or get an \u201cendorser,\u201d i.e., a cosigner.<\/p>\n Like your student\u2019s federal loans, PLUS loans have interest rates and fees set by the federal government, and they aren\u2019t cheap. Currently, PLUS loans have a fixed interest rate of 8.94% <\/a>and an origination fee of 4.228% which is deducted from the amount disbursed.<\/p>\n Additionally, while you can choose to defer PLUS loan payments until six months after your student leaves school, interest will accrue while they are in school, unless you make payments.<\/p>\n There are myriad private lenders with student loan products that can help dependent undergraduates bridge the funding gap. The problem is that the vast majority of undergraduate students don\u2019t have the minimum credit score or income requirements<\/a> to qualify for a private student loan on their own. Typically, private lenders require an established credit history, a credit score in the mid 600s, and a minimum income of $24,000\u2013which is a tall order for an 18-year-old.<\/p>\n But these requirements aren\u2019t such difficult hurdles for the average parent of a college student. In fact, if you have a decent credit score<\/a> and a good<\/a> income<\/a>, you may help your student qualify for a favorable interest rate.<\/p>\n But private loans are more likely to require immediate repayment, rather than allowing for a deferment until your student is done with school. In addition, private loans have no path to forgiveness, few repayment plan options, and zero federal protections.<\/p>\n A recent survey of parents who cosigned private student loans for their students found that one-third of respondents<\/a> did not fully understand the risks of cosigning. Specifically, if you cosign a loan with your kid, this is what you\u2019re signing up for:<\/p>\n The pressure you\u2019re feeling to bridge the funding gap at Big Bucks University is real, especially if your kid has dreamed of attending BBU for years. But there\u2019s a real cost to cosigning a private student loan to help your child pay for their education, and it\u2019s important to slow down and consider the risks before you sign.<\/p>\n To start, remember the massive size of the national student loan debt. Your child is about to become one of the 42.8 million federal student loan borrowers who owe a total loan balance of $1.693 trillion.<\/p>\n Unfortunately, more than one out of every 10 borrowers defaults on their student loans within the first three years of repayment. Minimizing the amount your student borrows can help protect them from becoming part of this statistic.<\/p>\n If you are facing a funding gap, you generally have two options: a federal Parent PLUS loan that you take out, or a private student loan you cosign with your student. The Parent PLUS loan has an 8.94% fixed interest rate and an origination fee of 4.228%, and borrowers must not have adverse credit history. The PLUS loan offers some federal protections, but fewer than the loans your student is taking out on their own behalf.<\/p>\n Cosigning a student loan with your child may offer a lower rate, depending on your qualifications, but it puts you at risk of taking over the loan if your child defaults, hurting your credit if your child makes a late payment, affecting your credit, hurting your retirement, and potentially souring family relationships.<\/p>\n If you and your kid go into cosigning a loan with your eyes wide open, your expectations explicitly spelled out, and an iron-clad agreement about how many times you\u2019re each allowed to roll your eyes, it can be a viable method of filling a funding gap.<\/p>\n But without clear expectations in place, a cosigned loan can become the beginning of the kind of tragic family story Aunt Gertrude tells when she\u2019s feeling maudlin.<\/p>\n<\/a>Student loan debt by the numbers<\/h2>\n
<\/a>Parent PLUS vs private student loan<\/h2>\n
<\/a>Parent PLUS loan<\/h3>\n
<\/a>Private student loans<\/h3>\n
<\/a>What it means to cosign<\/h2>\n
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<\/a>Cosigning can be a risky business<\/h2>\n