With the cost of a private college education approaching $40,000 per year, millions of parents are taking on increasing burdens of debt in order to finance their kids' educational endeavors. Likewise, many students are racking up student loan debt thanks to the growing reliance of the so-called "education complex" on loan-fueled student spending. Although the average college graduate leaves school with about $21,000 in student loan debt, this figure doesn't account for the acute problems that private-college students face. In a tight job market, private-school grads who lack practical degrees may find themselves on the hook for $50,000 or more in interest-accruing student loans. Many of these unlucky individuals will eventually default on their debts.
In such an environment, many parents are considering taking the risky step of cosigning for their kids' loans. If you're facing such a quandary, you should weigh several important factors before committing to a particular course of action. If you make the wrong move, you could end up in a heap of financial trouble. Alternatively, you run the risk of alienating your college-bound child.
Until recently, most parents chose not to cosign their kids' student loans. These credit facilities were designed to accrue interest in a quiet fashion for several years. Few student lenders demanded repayment until their customers had the financial wherewithal to repay them on their own. Since a four-year college degree was a near-guarantee of stable employment for most of the 20th century, this arrangement made perfect sense to everyone involved. In fact, relatively few parents worried about their students' debt burdens.
These days, the situation is far different. Since the cost of higher education has skyrocketed, students are relying more heavily on private and public loans. At the same time, the falling value of a college degree has driven lenders to increase their rates and write up stricter repayment plans. Although federally-backed student loans are still available to qualified students, many student lenders simply refuse to lend to students who fail to meet certain financial criteria. In many cases, students can't procure a loan without earning a cosigner's blessing.
If you cosign your child's student loan, you'll need to ensure that he or she is serious about repaying the loan. If the loan falls into arrears, you'll be on the hook for making timely payments on it. Failing this, the loan will slide into default and deal a significant blow to your personal credit score.