Currently, it’s nearly impossible for most students to attend college without student loans in the United States. In fact, according to a 2019 report from the Institute for College Access and Success, more than two-thirds of students borrowed money for school in 2018.
That’s because tuition has been rising exponentially faster than household incomes. According to CNBC, statistics from the College Board, which has tracked costs at both public and private colleges and universities since 1971, show the average total cost of attendance — including, tuition, room, board, and fees — has more than doubled in the decades since they first began tracking. (You can download the full spreadsheet on the College Board’s site.) Yet median household incomes haven’t. It’s no wonder borrowing has become so commonplace.
The Reality of Student Loans
While tuition cost has been on a steep rise, average family incomes have not kept pace. For example, when the College Board first started monitoring tuition, the average cost of one year at a public four-year university was $8,890. Back then, that was nearly 18% of the median family income of $50,200, according to statistics compiled by the Pew Research Center. By 2018, the median income rose to $74,600, an increase of 47%. But the cost of attending a public university rose 145% to $21,790 per year. Thus, the cost of attending college has come closer to a third of the median family’s annual income instead of less than one-fifth.
That’s why the vast majority of students find themselves in need of student loans. Even worse, while most federal loans (except Parent Plus loans) don’t require a credit check — and thus no co-signer — they have limits on borrowing that may not be enough, even along with other financial aid, to cover a student’s total cost of attendance. And that’s even more problematic for undergraduate students than it is for graduate and professional students who have access to Grad Plus loans, which allow them to borrow up to the total cost of attendance.
As such, many students find themselves needing additional aid, and this is when they may turn to the kinds of loans that could require a co-signer — private student loans.
Why Students Need a Co-Signer
Most college students haven’t yet built a credit history. But that’s not a problem when it comes to borrowing federal student loans — the most common way to pay for college, according to the National Center for Education Statistics.
However, when the combination of aid offered to a student — grants, scholarships, federal loans, state loans, institutional loans, and work-study — fall short of one’s ability to pay for college, students may turn to private loans through a company like Lendkey for help. And these do require a credit check. So a student with no credit history, poor credit, or insufficient qualifying income could find themselves in need of a co-signer.
Private loans can bridge the gap left when savings and financial aid fall short. But they come with significant drawbacks. So before you agree to co-sign for a student loan, make sure the student understands the disadvantages of borrowing private student loans versus federal student loans. Private loans have higher interest rates than federal loans, and unlike federal loans, there’s no cap on how high the rate could go. Borrowers also won’t have access to some options for paying back student loans, such as government repayment programs. And they’ll have limited options for deferment or forbearance if they encounter economic hardship or have difficulty finding a job after graduation.
For these reasons, students should only take out private loans as a last resort. So before considering one, make sure you and the student have thoroughly researched all the other options to pay for college, including the possibility of working while in school.
Additionally, if you’re a parent considering co-signing a loan for an undergraduate, you have the option of taking out a federal Parent Plus loan in your own name to cover the gap between your child’s financial aid package and their total cost of attendance. While repayment options for Parent Plus loans are less favorable than for other federal direct loans, if you find yourself in need of these options, they’re still far superior to private student loan repayment term options. And you can always make an agreement with your child that they’re ultimately responsible for the repayment — just as they would be with a private loan taken out in their own name. If they fail to repay you for the Parent Plus loan, you’re still just as financially responsible — but on a loan with more favorable terms and better repayment options.
If a private loan still seems like your only recourse, before you sign on the dotted line, make sure you carefully consider all the risks involved to yourself and the student borrower.
The Risks of Co-Signing a Private Student Loan
Co-signing any kind of loan is always risky because you’re taking on joint responsibility with the borrower to repay the loan. But when you co-sign a private student loan, you take on even more risk because the law treats student loans differently — whether the federal government or a private bank lent the money. There are also emotional repercussions that could put a strain on family relationships.
1. You Are Responsible for the Loan
When you co-sign a loan — any loan — you have equal responsibility as the borrower, even though it is in the borrower’s name. That means, should the borrower become unable to pay, the bills fall on you. It also means your credit report is affected if the borrower makes late payments or becomes unable to pay. And if the bills go unpaid long enough, you become subject to legal action to collect on the borrowed amount.
While it may seem like a better idea to put a student loan in the student’s name, especially if they’re the ones ultimately responsible for it, this is one reason to consider a Parent Plus loan as an option. Even if you hadn’t intended to borrow the money yourself, at least you’ll have some control over the management of payments.
2. It Requires a Long-Term Commitment
Although private lenders have far fewer repayment options than the federal government for repaying the loan, loan terms can stretch out for more than 10 years when borrowers take advantage of deferments, forbearances, or interest-only payment periods. Thus, it would not be unusual for repayment to take as many as 15 or 20 years.
Further, although some lenders have programs for dropping the co-signer after borrowers make a certain number of on-time payments, releases of co-signers are rare and frequently mishandled. That’s one of the many reasons The New York Times reports the Consumer Financial Protection Bureau filed suit against Navient, a servicer of both government and private loans, in 2017. However, that lawsuit is still awaiting settlement, leaving borrowers hanging in limbo for years.
3. It Can Cause Family Strain
As parents, we want to be there for our kids in every possible way. But the financial anxiety and discomfort that comes with managing a long-term loan can place strain on any relationship. Depending on how much you co-signed for, the debt may actually keep you up at night — whether just because it’s hanging over your head or wondering whether your child will be able to keep paying their bill. Worse, if they become unable to repay, you could experience resentment toward your own children and significant regret for ever signing.
4. There Are No Legal Limits on the Interest Rates
Unlike federal student loans, which have statutory caps on how high the interest rate can go, no such laws govern private lenders. Banks like to stay competitive with one another by offering the best rates — especially for the most creditworthy borrowers. But that rarely means lower interest rates than federal student loans offer. (The sole exception to that is refinance loans. But they aren’t available until after graduation and require excellent credit.)
For example, I borrowed private loans for my first two years of graduate school before the government offered Grad Plus loans. And today, the interest rate on the private loans is twice the rate on my federal loans — including the Grad Plus loans I borrowed for the next few years when they became an option.
Further, lenders can raise the rates for late payments, just like credit card companies do. And the rates are often variable, which means they fluctuate with market conditions. So even if the borrower does everything right, the rate can still go up. And if the borrower doesn’t do everything right — misses payments or defaults — then all that falls on you.
5. Interest Starts Accruing Immediately
Unlike federally subsidized loans, private student loans start accruing interest as soon as they’re disbursed. And after the borrower graduates, and their repayment grace period expires, the interest capitalizes — is added to the principal balance. That means they end up paying interest on the new higher amount, or interest on top of interest.
That’s what happens with federal unsubsidized loans also. But it’s nevertheless worth your attention because that loan you co-signed for could be significantly higher after the student graduates.
6. Private Lenders Don’t Forgive Student Loans
For students who end up borrowing high amounts — $100,000 or more — the option of having their loans forgiven after 10, 20, or 25 years of payments (depending on the income-driven repayment program) can be critical — especially if they end up working in a low-paying public service field like teaching, social work, public defense, or public health. Federal loan borrowers have the option of public service loan forgiveness — meaning they have no further obligation to pay on any outstanding balance — after 10 years of payments made while working full-time in a public-sector or nonprofit job like teaching, public health, social work, or public defense.
And although some jobs come with the perk of student loan repayment assistance — usable toward any kind of student loan — private lenders themselves never offer forgiveness options. So you’ll both be stuck with the loan until one of you pays it off in full.
7. It Can Damage Your Credit
According to Experian, one of the three major credit reporting bureaus, whenever you co-sign for a loan — any loan — it shows up on your credit report and the borrower’s. That means even if the borrower makes on-time payments, it still counts against your total debt-to-income ratio, which is a factor in your overall FICO score.
Worse, though, if the borrower makes late payments, those will count against you too, further lowering your credit score. And that damage to your credit score can result in difficulty getting loans for things you need for yourself — like a credit card, car loan, or a refinance on your mortgage. It can even affect your ability to get a new job and can raise the interest rates on any current loans.
8. There Are Limited Options for Economic Hardship
Private lenders are much less generous than the federal government when it comes to deferment and forbearance options. The borrower may lose their job through no fault of their own, but they’ll still be required to pay their monthly private student loan bill. Even if the borrower has the best of intentions to repay the loan, the future is unpredictable — especially when you take out a loan with such a long repayment term. And if facing unemployment, the borrower will become unable to pay their bill with no way out. That means it will fall on you.
9. The Borrower May Be Unable to Pay
Even if your child is the brightest student and chosen “most likely to succeed,” some students are simply unable to find jobs after graduation. And those who do are often underemployed. June 2020 data from the Federal Reserve Bank of New York shows that 39% of recent college grads are underemployed. Worse, there’s no telling how long that situation could last.
So even if deferment or forbearance is a temporary option, they may need a longer-term solution, such as one of the income-driven repayment options offered for federal loans. But private lenders have nothing like this. And that means if the borrower becomes unable to pay for a long period, you’re stuck making all those payments.
10. You Can’t Get Student Loans Discharged in Bankruptcy
If the borrower becomes unable to pay, bankruptcy may seem like an attractive way out. However, not all debts are treated equally in bankruptcy. Student loans — whether federal or private — are considered “priority debts.” That generally means they aren’t eligible for discharge through bankruptcy and someone must ultimately pay them.
Technically, there is an “undue hardship” test for student loans to be discharged. But the test is so severe it’s virtually impossible to meet the standard. According to Hartman Bankruptcy Law, a borrower must prove both that repaying the loans would not allow the borrower and their family to have a “minimal” standard of living and that there is no possible way — now or in the future — the borrower would ever be able to repay the loans. Very few borrowers ever meet this test.
Worse, not only is it exceedingly difficult for a borrower to get their student loans discharged, when you co-sign a loan, that means the court will also look at your ability to repay it — since you’ve assumed equal responsibility. Plus, if the borrower ever does attempt a bankruptcy, that could trigger the lender to come after you.
11. They Have Less Generous Default Terms
When it comes to repaying private student loans, you’re really and truly stuck if you can’t pay them. Deferment and forbearance terms are less generous than with federal loans, lenders have limited repayment programs, and the option of bankruptcy is off the table. Perhaps worst of all, private lenders have significantly shorter default terms.
If you stop paying on a federal student loan, you have 270 days — roughly nine months — before your loan they consider your loan defaulted. Default means all repayment options are off the table and your loan is now due in full — although, technically, with federal loans you can get back out of default through consolidation or rehabilitation.
None of this is the case with private student loans. Private lenders can consider a loan in default if it’s as little as one day past due. Though most private lenders give you at least 30 days, nine months is unheard of. That means if the borrower skips as little as one month of payment, the lender can begin further action to collect — including referring the total debt to a collection agency and even starting legal proceedings to collect on the amount due.
Again, because your name is on the debt, the lender will come after you too.
12. You Could Become Subject to Debt Collection
Debt collectors are rather aggressive in tracking you down and barraging you with letters and phone calls. It can be very disconcerting, especially when the debt isn’t even technically your own. If this ever happens to you, it’s vital you know your rights.
According to the Fair Debt Collection Practices Act, a debt collector can never:
- Contact you before 8am or after 9pm
- Contact you at work if you tell them you can’t receive calls there
- Contact anyone other than yourself or your spouse about the debt (unless you hire an attorney, in which case they must speak only with your attorney unless they fail to respond within a certain time frame)
- Harass you, including calling you excessively just to annoy you or using abusive language, such as threatening you with violence or harm and using profanity or obscene language
- Lie, including misrepresenting the amount you owe, claiming to be attorneys or government representatives, falsely claiming you’ll be arrested, or falsely claiming legal action will be taken against you
- Try to collect charges such as interest and fees on top of the amount you owe unless state law or the contract allows it
- Deposit a postdated check early
- Take or threaten to take your property unless they’re legally entitled to take it
If the debt collector violates any of these, be sure to document all the instances, as you want to talk to an attorney about the possibility of filing a countersuit should the debt collector ever attempt to sue you to collect on the loan.
You can also make phone calls stop by verbally informing the debt collector they’re only allowed to communicate with you in writing. In fact, that should be standard practice anyway, as you never want to give personal information over the phone. Unfortunately, these days, scam phone calls are prevalent, and there’s simply no way to verify a caller is legitimate.
Alternatively, you can send the debt collector a cease-and-desist letter informing them to stop all contact. If after you’ve sent a letter or told the collection agency to stop calling you, they continue to do so, that’s considered harassment and is illegal. Be sure to consult with an attorney for specific legal advice.
13. Lenders Can Garnish Your Wages
The one silver lining when it comes to private student loan debt is that there is a statute of limitations to collect on the debt. It varies by state from three years to 10 years, but six years is the most common. For a state-by-state list, visit Nolo.
There is no such limitation on federal student loans, which are with you for life. However, most likely, if neither you nor the borrower have been paying on it, the lender will attempt to sue before the statute is up.
When it comes to federal student loans, the U.S. Department of Education (DOE) can garnish your wages or Social Security or seize your tax refunds. A private lender can’t do this without suing you. But if they succeed in getting a court order, your wages — in addition to the borrower’s — can be garnished for the unpaid debt since you’re both equally responsible for repaying the loan.
If your lender files suit, be sure to respond by the deadline on the court papers to preserve your rights. And look into finding an attorney, either through your local bar association or a national search service like FindLaw.
14. They Aren’t Discharged If You or the Borrower Dies
If you borrow federal student loans, including Parent Plus loans, if either you or the student you borrowed the loans for dies, the DOE will discharge the loans — as long as you send a valid death certificate.
That’s not the case with private student loans. Instead, that debt becomes a creditor against your estate. And while no parent likes to think about something happening to their children, accidents and illnesses do occur. And you’ll not only be left heartbroken, you’ll have their unpaid student loan debt on top of it.
If you decide to co-sign on a private student loan, ask the borrower to take out enough life insurance to cover the loan should the worst happen.
15. It Puts Your Retirement at Risk
If you’re left paying on the co-signed student loans, you could put your retirement at risk. While wanting to help our children pay for college is noble, there are no loans to get you through retirement.
In fact, it’s standard advice of most financial advisors to ensure your own retirement before your child’s education. That’s because if you miss out on putting a significant amount toward your retirement savings because you’re saving for your child’s education, they could be the ones taking care of you financially in the future. So it doesn’t benefit them in the long run to forget about yourself.
It’s natural for parents to want to do all they can for their children. But you need to ensure you’re making smart choices for yourself as well. And co-signing for a private student loan may not be the best choice for either of you.
Though borrowing loans for college has become a fact of life for most Americans, private student loans have extraordinary drawbacks. And co-signing for one means those drawbacks could hit you both. Unfortunately, it’s something I’ve learned from personal experience.
So before you co-sign a loan, be sure you understand all the implications — and discuss them with your child. According to a 2019 survey by ACT (makers of the test), most students don’t fully understand the debt burden they’re taking on when they first start college. So it’s essential that if you’re going to sign legal obligations as a family, you really and truly take it on as a family.
And that may even mean deciding not to co-sign. If you do make that decision, know there are plenty of other ways you can help your child pay for college, including helping to research loan alternatives, scholarships, or other financial aid options. Don’t ever feel pressured to make a decision so vital to the future of both yourself and your child unless you’re fully prepared to accept that you might end up having to foot the bill.
What options have you looked into for funding your child’s education? Does a private student loan seem like the only choice to bridge their gap in financial aid?