Do parents have to cosign student loans?

If you’re taking out a private student loan to pay for college, you may need a cosigner to help you qualify if you can’t meet a lender’s eligibility requirements. But if you’re using federal dollars to cover the cost of your education, you probably won’t need one.

Regardless of whether you have someone to cosign, your first move should be filling out the Free Application for Federal Student Aid (FAFSA) to see if you’re eligible for federal student loans.

Here’s what you should know if you’re a parent considering cosigning your child’s student loans.

• Do parents have to cosign student loans?
• Benefits of parents cosigning student loans
• Drawbacks of parents cosigning student loans
• Alternatives to parents cosigning student loans
• Is it better to get a parent loan or cosign a student loan?

Do parents have to cosign student loans?

Parents don’t have to cosign student loans. Your child likely won’t need a cosigner for federal loans since most of them don’t require a credit check.

But since federal loans have a borrowing limit, your child may have to turn to private loans to fill in funding gaps. When this happens, they may need a cosigner if they can’t meet a lender’s credit requirements on their own.

Benefits of parents cosigning student loans

Before you cosign your child’s student loans, consider the pros and cons. Here are some advantages of cosigning your child’s student loans:

• Improves the odds of approval — If your child is short on credit history or has bad credit, they’ll likely have a tough time qualifying for a private student loan without a cosigner. But if they apply with a cosigner who meets a lender’s eligibility requirements, it can help them get approved.
• Potentially lower interest rate — Private student loan rates are often based on a person’s credit history. If you have good credit and cosign your child’s student loan, it could help them score a lower interest rate.
• You can be removed from the loan before the repayment term ends — You can be removed as a cosigner in two ways. Your child can remove you by refinancing the loan, or some lenders may allow the primary borrower to release a cosigner after making a certain number of on-time payments and meeting its borrowing requirements. Each individual lender’s terms vary, so it’s a good idea to compare lenders before making a decision.
• Can help your child establish or improve credit — Payment history is the most important credit factor, accounting for 35% of your credit score. If your child repays their student loan on time, it’ll add a positive payment history to their credit reports. As a result, their credit score could increase.

Drawbacks of parents cosigning student loans

Although cosigning your child’s student loans can help them pay for school, here are some potential risks you should keep in mind:

• You’re responsible for the loan if your child defaults — Cosigning a loan for someone makes you responsible for repaying the loan if the primary borrower can’t make their payments. So, if your child defaults on the loan, a lender will require you to make the payments.
• Could harm relationships — If your child can’t afford to make their monthly payments and you have to make them, it can create tension in your relationship.
• Can affect your ability to qualify for financing — When you apply for financing, a lender will likely factor in the monthly payments on the student loan you cosigned for to calculate your debt-to-income (DTI) ratio. If your DTI ratio — your monthly debt compared against your gross monthly income — is high, it can make it tougher for you to qualify for other financial products.
• Potential damage to your credit — If your cosigned loan becomes 30 days past due or longer, a lender can report the late payment to the three main credit bureaus — Equifax, Experian, and TransUnion. As a result, it can damage your credit.

Alternatives to parents cosigning student loans

Several student loan options don’t require a cosigner. For starters, remember that most federal loans don’t require a cosigner. This means a borrower’s eligibility is based on financial need and not their credit history.

To check if your student is eligible for federal loans, they have to fill out the FAFSA. They must provide personal and financial information, such as their Social Security number, bank statements, W-2s, and federal tax returns.

If they’re an independent student, they’ll only have to provide their personal and financial information. But if they’re a dependent student, they’ll also have to include your same information. Your financial information will help determine what type of federal loan they might qualify for.

Once they submit the FAFSA, they may qualify for these types of federal loans:

• Direct Subsidized Loans — These loans are offered to undergraduate students who meet certain financial needs requirements. The U.S. Department of Education pays the interest on subsidized loans while your student is in school, during periods of deferment, and during their six-month grace period after graduating.
• Direct Unsubsidized Loans — Any undergraduate, graduate, and professional students can qualify for these loans since eligibility isn’t based on financial need. One major downside is that the student is responsible for the interest accrued while they’re in school.
• Direct PLUS Loans — Two options, the Grad PLUS Loan and the Parent PLUS Loan, are available to graduate students, professional students, and parents of dependent undergraduate students. These loans are subject to a credit check. But borrowers may still be able to qualify for a loan, even with adverse credit history.

Private student loans

Your child typically needs good credit to qualify for a private student loan on their own. But some lenders offer student loans without a cosigner. And it may be possible for them to qualify for a student loan with bad credit.

If they apply for a private student loan with bad credit, keep in mind they’ll likely be charged a higher interest rate. To boost their approval odds and chances of securing a low interest rate, consider adding yourself as a cosigner.

Is it better to get a parent loan or cosign a student loan?

A Parent PLUS Loan is a federal loan that’s available to parents of undergraduate students. With this option, your name will be the only one on the loan. This means you’ll be solely responsible for repaying the loan.

By contrast, cosigning a student loan means your name and your child’s name will be on the loan. If your child can repay the loan on their own, you won’t be on the hook for making payments. As a result, more of your hard-earned money can be directed toward other goals, like retirement or a dream vacation.

That said, a Parent PLUS Loan isn’t necessarily better than a cosigned private student loan. The option that’s better for your child may not be what’s better for you. You’ll have to consider which option is best for you based on your unique circumstances.