Helping Your Kids Pay for College: Co-Signing for Their Private Student Loans

We know college can be expensive. And in the current economy, money’s tighter this year for a lot of families than it has been. Even with federal financial aid like grants and college loans, you may have education-related expenses left to cover but not enough in savings to cover them.

If you and your kids have already taken advantage of all your low-cost federal financing options like Stafford student loans and PLUS parent loans but still have college costs to meet, you may be able to get the extra money you need from private student loans.

Why do my kids need a co-signer?

Most private student loan programs require students to apply for a private loan in their own name. But unless they can meet a lender’s income and credit requirements — which, after the subprime mortgage debacle, are even more stringent this year — your kids will need a creditworthy co-signer to qualify.

Many college students simply don’t have a long enough established credit history or make enough money to qualify for a private loan in their name alone.

Even if your kids do qualify for a private loan on their own, they may still be able to benefit from having you as a co-signer. Borrowers with stronger credit profiles often qualify for lower interest rates and fees than borrowers with weaker credit. If you have more disposable income and a better and more established credit history than your college kids, when you co-sign on their private student loans, you may be able to help them qualify for a better rate and lower, or even zero, fees.

What will I need to do in order to be a co-signer?

You’ll have to undergo a credit and income check. Specific credit and income requirements vary by lender, but you can expect to have to provide certain personal and financial information when your children apply for a private loan:

• Your name, date of birth, and Social Security number
• Your home address(es) for the past two years
• Your employer and income information
• Contact information for two or three references who don’t live with you

If your loan is preapproved based on your application information, you’ll usually have to provide some final documentation verifying your address (like utility bills or a driver’s license) and your income (like pay stubs, tax returns, or pension award letters).

What am I responsible for as a co-signer?

As a co-signer, you’re assuming financial responsibility for your children’s loan. That means that if they miss a payment, the lender can come to you to collect; if you don’t cover your kids’ missed payments, those missed payments will go on your credit report too, not just on your kids’.

Once I co-sign, how can I minimize the risk to my own credit?

As a co-signer, you can’t absolve yourself of financial responsibility altogether, but there are a few things you and your kids can consider to help protect your credit.

• Sign up for automatic monthly payments.
  Most private loan programs will allow students to defer making payments while they’re enrolled in school at least half time. Once your kids enter repayment, talk with them about enrolling in an automatic payment plan. With monthly payments coming straight out of your kids’ bank account, as long as your kids aren’t overdrawn, you can have the peace of mind of knowing you won’t get your credit dinged for any late payments.
• As an added bonus, several lenders offer an interest-rate reduction for borrowers who sign up for auto-pay plans, which means even lower, more affordable monthly payments for your kids.
• Look into a co-signer release program.
  Some lenders offer a co-signer release benefit with their private student loans, in which students can request to release their co-signer from all financial responsibility after making a certain number of consecutive on-time monthly payments — this string of required timely payments typically runs between three and five years.
• One possibility, if you’re willing to take on some of your children’s college expenses, is to come to an agreement with your kids that you’ll cover their student loan payments for that time period, and then once you’re released as their co-signer, they’re on their own.
• Before any lenders will release you as a co-signer, though, they’ll usually require that your children be able to meet the loan’s income and credit requirements on their own at that time — so up until that point, your kids will have to maintain good credit and a clean payment history on any other debts they have in their name.
• Consider a repayment contract with your kids.
  Talk to your kids about setting up a repayment agreement, come to an understanding about what you’re willing to do as their parent and co-signer, and then put it in writing. This contract doesn’t have to be an IOU for the total loan amount; it can be more along the lines of a written promise from your kids to make their monthly payments on time, and it can set out some guidelines for them repaying you if you ever need to cover one of their payments.
• Make sure your children know this isn’t an issue of you not trusting them, but just a way of getting you both on the same page about what everyone’s financial responsibilities are — approach it as a friendly financial transaction instead of a personal one. Most levelheaded and responsible college kids will appreciate you treating them like an adult and take their commitment to you seriously.

I love my kids, but …

We know co-signing for your kids’ student loans is a big commitment, and it can be nerve-wracking when the state of your credit is in someone else’s hands. But you also know your kids: Are they reliable, dependable, smart with their money? Do you trust them to handle their student loan payments responsibly?

And even if the answer to both those questions is yes, you probably can’t help all the other questions running through your head: What if my kids have trouble finding a job out of college or lose their job while they’re still paying off their student loans? What if they can’t afford to make their payments? Am I comfortable taking on the financial burden of their student loans for them when they’re coming up short?

One way to look at it is if you can help your kids qualify for a lower interest rate by co-signing on their private student loans, you may be helping to ensure that they don’t run into problems repaying those loans. A lower interest rate means lower monthly payments, which may be easier for your kids to meet when they’re just out of college and starting a new job.

On an even more basic level than better rates and fees, you co-signing on a loan may be the difference between your children being able to get the money they need for college and not.

At the end of the day, as you sort through all your questions, it may all just boil down to asking yourself this: If my being a co-signer means my kids can afford to pay for college, is it worth it?

And the only one who can answer that question is you.