Your child's starting college soon. As a parent, you probably have mixed feelings (it's a bittersweet time!) and many questions about the financial side of things. Student loans are likely top of mind.
While your son or daughter can borrow funds on their own, you may be considering helping out, too. Co-signing your child’s loan or taking out a parent loan helps make college more affordable for your child. Before you choose either option though, it's important to understand the benefits and drawbacks of co-signed loans and parent loans.
The key difference
As a co-signer of your child’s loan, you’re just as responsible for payments as your child. When you take out a parent loan, you’re the only one who’s responsible. There are certainly reasons you’d choose one over the other.
Co-signing your child’s student loan
The benefits of co-signing your child’s loan are twofold: You help your son or daughter get approved, and you may help him or her receive a better interest rate.
When your child’s young and just starting out, their credit score is likely just so-so — they haven’t had time to build a strong credit profile yet. Your child may be declined for a private student loan on their own or receive a lackluster interest rate if approved. By adding yourself as a co-signer (provided you have good credit), you’re letting the lender know there’s someone with strong credit backing it. In return, you can often help your child get approved with a better rate.
Many times, a co-signer is added simply for approval, not with the intention of helping with payments. But be sure you have this conversation upfront so you’re on the same page. Will your child be expected to make all payments post-graduation? Or, do you plan to pay some or all of the loan? It’s a good idea to discuss your expectations ahead of time. Keep in mind though that both you (as the co-signer) and your child (the primary borrower) are legally responsible for the loan even if you initially agree with each other that only one party will be making payments.
Also, note that both your credit score and your child’s will be impacted by this loan. It’s a chance to help your child build credit.
Taking out a parent loan
With a parent loan, you’re taking full responsibility for paying at least a portion of your child’s education. A parent loan is the simplest option if you’re intending to pay the full sum of the loan. You won’t have to worry about any ambiguity on who’s making the monthly payment. It’s always you.
Because the loan’s in your name, making payments regularly will affect only your credit score, not your child’s. You won’t have the potential to boost your child’s credit score like you would by co-signing. However, you also have the peace of mind in knowing only your own actions affect the account and your credit score.
Here we’re discussing private loans, but please note there’s also a parent loan offered by the federal government—the Parent PLUS Loan. It’s an option for parents of dependent undergraduate students, one that requires a separate application from the FAFSA. Unlike other federal loans, your credit profile is a factor in approval.
Refinancing a co-signed loan or parent loan
When your child graduates, you may want to try for a better interest rate. As the co-signer, you can’t transfer full responsibility to your child by refinancing—your son or daughter would need to be the one applying. However, you could refinance the loans in your own name.
Your child may be able to opt for another private loan with or without you as a co-signer. If they’re getting a loan on their own, just keep in mind that their own credit profile will be evaluated this time for approval, not yours. Beyond adding a co-signer, there are a few other ways your child can get the best rate possible.
With a parent loan, you can refinance your loan into a private loan. Some lenders also may have the option to refinance the loan in your child’s name instead of your own.
A final consideration
It’s a somber topic, but one that’s very important to keep in mind: What happens to private student loans should the unexpected happen?
If the co-signer dies, the child (the primary borrower) will have full responsibility for the loan. For a parent loan, a death discharge may be offered, since the loan is under only the parent’s name. To provide financial security for your loved ones, first understand what the financial obligation would be for your situation then consider choosing a life insurance policy. You’ll help protect your family should the unthinkable happen.