Editor’s note: This is the sixth article in a fall financial series of New Dentist Now blog posts from Darien Rowayton Bank, which provides student loan refinancing and is endorsed by the American Dental Association. Qualifying ADA members receive a 0.25 percent rate reduction to DRB’s already low rates for the life of the loan as long as they remain ADA members. View rates, terms and conditions and disclosures at student.drbank.com/ADA.
With the cost of college continuing to rise, some students are seeking private loans after they’ve reached the cap on federal loans. However, since most young adults haven’t had time to establish credit or proof of income, they’re unlikely to qualify for private loans. You as the parent, on the other hand—experienced in your dental career, low risk in the eyes of a lender—may be ideally suited to co-sign a loan on behalf of your child.
It’s rewarding to reach a point where you’re able to help your kids financially, and many parents are doing it: A 2012 report by the Consumer Financial Protection Bureau (CFPB) found that more than 90 percent of private student loans were co-signed, often by a parent or grandparent. However, there are some questions you should ask before co-signing a loan. These questions apply to co-signing any loan, but with the cost of college education being so high, they’re especially important when it comes to student loans.
What are you signing up for?
As the co-signer of a loan, you are on the hook for the debt. The loan is in your child’s name and they are primarily responsible for making the payments. However, if they default, you’re next in line and are legally obligated to pay. If you don’t, the lender can come after your assets.
What are the risks of co-signing a loan?
Assuming your child makes loan payments on time and in full, it doesn’t negatively impact your credit. In fact, good payment behavior by your child can actually help improve your credit score, since a co-signed loan shows up on your credit report in the same way a loan in your name would. The flip side is that if your child defaults on payments, your credit will take a direct hit.
In addition, having a co-signed loan on your credit report means that it counts toward your debt-to-income ratio. Lenders look at this ratio when deciding whether to lend money, so if you’re planning to apply for a mortgage or other loan in the near future, you may want to reconsider co-signing.
One final but important risk of co-signing a loan is potential damage to the parent-child relationship, in the event that things go awry with loan payments. Before agreeing to co-sign a loan, talk honestly with your child about responsibilities and expectations.
Have you exhausted all other options?
Before considering private student loans, your child should apply for any available federal loans. Federal loans don’t consider credit scores or income levels, so they don’t require a co-signer—and they usually carry lower interest rates than private loans. Filling out the Free Application for Federal Student Aid, or FAFSA, is the best way for your child to determine their federal options.
Scholarships and grants are another option, one that allows you to avoid accumulating interest or damaging credit. There are so many scholarships and grants available through universities, companies, and government organizations. Finding them can require some digging, and applying takes time, but they’re the best kind of financing because you don’t have to repay them.
A final option to consider before co-signing on the dotted line is an informal family loan. You need to be in a very solid financial position to offer a direct loan, and you still risk payment defaults. However, informal loans don’t accumulate interest, and you avoid risking your credit standing and increasing your debt-to-income ratio.
What are the terms for co-signer release?
A co-signer release refers to when the parent gets contractually alleviated from their role as co-signer, after the child meets certain income requirements or payment goals. It is important to understand the fine print around co-signer release, because if you can’t get out when you need to, you risk damaging your credit and eligibility for good interest rates on other loans.
Unfortunately, a CFPB report found that 90 percent of people who applied for a co-signer release were rejected. Much of the onus is on lenders to create more transparent contracts when it comes to co-signer release, but you can be proactive by asking questions about the requirements for being released from the loan. The CFPB created a resource guide to help you get started.
Finally, although it’s difficult to think about, you’ll want to ask whether you will be released from the loan if your child dies. If not, consider taking out life insurance on your child so that you’re able to manage your obligations as co-signer.
About DRB
DRB (Darien Rowayton Bank) is a national bank, marketplace lender, and the fastest lender in industry history to reach $1 billion in student loan refinancings. FDIC insured and established in 2006, DRB Student Loan has helped thousands of professionals with graduate and undergraduate degrees across the country to refinance and consolidate federal and private student loans, saving these borrowers thousands of dollars each.
DRB’s student loan refinancing program has been endorsed by the ADA. For more information about the student loan refinancing program, visit https://student.drbank.com/ADA. To learn more about how DRB can help you refinancing a Parent PLUS loan to a lower rate, visit https://student.drbank.com/