5 Topics You Should Discuss With Your Kid Before Co-signing a Student Loan

If you’re a parent looking at private student loans for your kid, you’re probably also thinking about becoming a co-signer. According to data firm MeasureOne, the vast majority of undergraduate private student loans — about 92 percent in the 2017-2018 year — are issued to students with a co-signer, such as a parent or other relative.

Even though co-signing a student loan is common, that doesn’t mean it’s not a big deal. Before sharing the responsibility of your child’s student debt, take the time to cover these five important conversation topics.

1. How co-signing a student loan affects your credit

Private lenders evaluate credit and cash flow before issuing a student loan, so it’s not surprising that most students can’t qualify on their own. As a recent high school graduate, your child hasn’t had time to build up a credit score. Chances are your student doesn’t have an income either.

That’s why most lenders look for a creditworthy co-signer to sign on to the loan. Some student loan companies, such as CommonBond, require a co-signer as part of the application process.

Adding your name to a student loan means your credit score is on the line. Because you share responsibility for the debt, your credit score could get dragged down in the case of late payments or default.

Before you sign on the dotted line, make sure your child understands that the credit scores of both of you will be impacted by this decision.

2. Figure out who is responsible for repayment

When social media manager and blogger Abby Hofrichter enrolled at Ohio State University, she and her parents agreed to take out co-signed student loans. Through the experience of sharing debt, her family learned some valuable lessons.

“One piece of advice I’d give is to have a sound conversation on what is going to happen when repayment starts,” Hofrichter said. “Set expectations on who will be making those monthly payments: Will the student be solely responsible, will the parents help out on occasion, etc.”

Not only will this conversation help prevent conflict before it occurs, but it will also guide your child while searching for jobs after graduation.

“It will set the student up for more success in navigating post-education jobs and salaries, as well as when choosing a repayment plan,” said Hofrichter.

You also should touch on what will happen if your child runs into financial hardship.

“Have a conversation on what it would mean should the student default on their payments,” said Hofrichter. “Neither party wants to be surprised by this, so everyone will benefit from setting up a path for open and honest conversation.”

The decision of who will pay back these private student loans is up to you. But make sure you’ve discussed these expectations so no one is caught off guard once repayment kicks in.

3. Calculate future monthly payments and interest

Not only should you talk about who will be paying back the loan, but you also should figure out exactly what those loan payments will be. Use a student loan calculator to plug in the principal amount and interest rate.

Play around with repayment terms so you can see how the length of repayment affects your monthly bills and interest.

For example, let’s say your family takes out a $20,000 loan at a 6 percent interest rate. Over 10 years, your child would have a monthly payment of $222 and would pay $6,645 in interest overall. If you shortened that term to five years, the monthly bill would go up to $387, but the interest would decrease to $3,199.

By breaking down these long-term costs, your child can see exactly what repayment will look like on the loan. If it looks too expensive, they could consider alternatives to borrowing, such as working a part-time job or choosing a less expensive college.

4. Consider the benefits of making payments during school

Students don’t have to wait until they graduate to start repaying their loans. Most private lenders offer the option of immediate repayment, fixed monthly payments or interest-only payments during school.

Making payments during school can prevent the debt from accruing a lot of interest. Plus, these on-time payments can help your child build credit.

With a strong credit score, your child could refinance the loan in their own name, thereby removing you as a co-signer. That’s how Hofrichter took control of her student loans.

“I started making small payments of around $50 a month on just one set of my loans while I was still in school, and it has made a great difference in my credit score,” Hofrichter said. “These small timely payments have boosted my credit score and thus served me better when taking over my loans and refinancing on my own.”

Besides refinancing, your child might also assume responsibility for the debt through co-signer release. Some lenders, such as CommonBond and Citizens Bank, offer co-signer release after a certain period of on-time repayment.

So while you might cosign in the beginning, your name doesn’t have to be on the student loan forever. If your child can make in-school payments, you might be released from the agreement even sooner.

5. Discuss expectations before co-signing a student loan

Money can be a touchy topic of discussion. But if you’re entering into a student loan agreement with your child, it’s essential to face these uncomfortable conversations head on.

By opening up the lines of communication early, your family can work together to repay the debt. You might also take this opportunity to talk about budgeting so your child has a plan for managing money moving forward.

While co-signing is common for private student loans, it can have big consequences for your finances. Make sure your family is on the same page before you enter into a student loan agreement together.

If you’re concerned about your credit, you can check your three credit reports for free once a year. To track your credit more regularly, Credit.com’s free Credit Report Card is an easy-to-understand breakdown of your credit report information that uses letter grades—plus you get two free credit scores updated every 14 days.

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