Affording to Hold My Student's Hands Throughout their Loan Borrowing
Being a Co-signer is a Loan Term Commitment
“Mom, will you co-sign on this student loan for me?” Most times parents (or grandparents or aunts or uncles) jump on this because they want to help their loved one. But before you sign on that student loan, analyze what this will mean to your finances, understand your student’s future earning potential, and gauge any awkwardness this may create in your relationship.
Why does my student need as a co-signer?
High school graduates and college students rarely have established themselves as credit worthy. Typically, it takes several years to demonstrate a history of paying credit back on time with their own income. With a co-signer, a private student lender can take a look at the credit worthiness of someone who can demonstrate positive, robust credit history to help them qualify for a student loan and receive a lower interest rate.
What does co-signing a student loan actually mean for your finances?
First, by signing the promissory note, you are agreeing to pay for the debt if your student does not.
Second, this debt will be references on your credit reports not just the student. That means that any late payments, missed payments, or (heaven forbid) default will be chronicled on your credit history and will affect your credit score as well if you don’t make the payments yourself.
Third, your debt-to-income ratio will change. This could inhibit you from seeking out other credit like a mortgage or business loan.
What should I know about my student’s future earnings?
Generally, experts suggest that students borrow no more that their first year salary in student loans (preferably less). As a co-signer, ask your student goal for a career post enrollment. Payscale reports that the average college graduate earns $48,400 as a starting salary. Salaries vary dramatically by jobs and locations.
How can co-signing affect my relationship?
Checking in on repayment along the way can erode a relationship. Without established mutually agreed upon communication norms about this shared debt, your relationship can be uncomfortable and face a lack of trust. When the student borrower does not act responsibly with their student loan payments by paying on time, your relationship can be even more strained, damaged, or even end.
How can I be a successful co-signer?
When you are asked to be a co-signer, take some time to figure out where you stand financially. Review your credit score, your current debts, and assess what other debts you may want or need to incur over the next 5-10 years. Then, have a candid conversation with your student reviewing ensuring that they understand that your healthy credit score is tied to their repayment habits. Also, this debt will also be reflected in your debt-to-income ratio. Even if you don’t expect to need to take on more debt yourself, make certain your student understand that it may limit you.
Next, l have an open conversation about what your student wants to do for a career post college. Discuss their employment ideas and review the different paths. If you want to dive into expected salaries by job, major, career, and location, check out U.S. Bureau of Labor Statistics Occupational Outlook Handbook (OOH).
Finally, settle on some communication to check in on repayment in the years to come. Decide on the frequency that you will touch base on repayment - - monthly, bi-monthly, quarterly. Or perhaps you determine a less intrusive method like creating online account access to view student loan repayment for both of you. Also, talk about giving advance notice if your student is ever unable to make the payment. To tackle any hiccups in payments, consider generating an emergency loan payment fund in the amount of 2-3 payments.
Colleen MacDonald Krumwiede is a financial aid expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Quatromoney to transform the way families afford college.