How Cosigning On a Student Loan Could Impact Your Finances

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While college students can get their own federal student loans without a cosigner in most cases, there are some situations where a cosigner is required. Federal Direct Parent PLUS loans, for example, can actually be taken out on behalf of dependents to help pay for higher education. Students can also apply for private student loans to pay for college. These loans tend to have high credit requirements that make it difficult for young people to qualify on their own.

But should you really cosign on student loans for your child? And should you cosign on any loans they can’t qualify for on their own? You can certainly consider it, but it helps to enter the situation with eyes wide open and understand all the pros and cons. 

The main advantage of cosigning is the fact that you’re helping your child (or dependent) pay for higher education when they may not be able to otherwise. However, it can also be a huge risk. Here’s everything you need to know before you sign on the dotted line.

You’re obligated to repay the debt no matter what

Whether you take on a Parent PLUS loan or you cosign with your child for a private student loan, the first thing you have to understand is that, no matter what, you’re obligated to pay that debt back. If your child stops making payments, you’ll be required to make them. If your child flat-out refuses to get a job and completely defaults on their responsibilities, you will need to repay that loan.

Cosigning on a student loan is similar to buying a house with someone or cosigning on a car loan. You’re both jointly responsible for repayment regardless of what the other person does. That can be a huge problem if your child doesn’t take their bills very seriously, but it may not be an issue if they treat their credit with care and stay on top of their bills.

Student loans are almost never discharged in bankruptcy

Another detail to understand is the fact that student loans are rarely ever discharged in bankruptcy. For the most part, they’ll stick around forever unless the borrower dies or you can prove you have some inescapable hardship. 

As a parent, you’re probably trying to save for retirement and reach other financial goals, so it’s important to understand that the student loans you cosign for will never go away until you pay them off — once and for all.

There’s no going back

When you cosign on a student loan, you can’t just change your mind and back out of the deal. Your child may be able to refinance their student loans in their name, but only if their credit score is good enough to qualify for student loan refinancing on their own. And if that was the case, they wouldn’t have needed a cosigner in the first place.

Your finances may be perfectly fine right now, but you should think through how they may be in five or 10 years. If you’re nearing retirement, you may not want to put yourself in a situation where you’ll be stuck paying off a child’s student loans. Plus, you never know how your health will be or the status of your career several years from now. Cosigning for student loans leaves you on the hook no matter what, and it’s hard to change that after the fact. 

Cosigning on a loan could affect your credit score

When you cosign on a student loan, you have to remember that you’re jointly accepting responsibility for the debt and any consequences that arise out of late payments or delinquency. So you should only cosign if you know your child or dependent is dedicated to paying their bills on time and avoiding default at all costs.

If you’re not paying attention, you could easily take a huge hit to your credit score without even knowing. Since payment history makes up 35 percent of your FICO score, it’s easy to see how even one late payment could cause major damage. Just think of what could happen if the student loans you cosigned for were paid late month after month. If you’re not also receiving a bill in the mail, you may not find out until the damage is already done.

The bottom line

There are situations where it can make sense to cosign on a student loan, but this decision should never be taken lightly. You may be helping your child earn their degree, but you’re taking a significant risk. (See also: Should You Co-Sign a Loan?)

You may want to assess the career field they plan to enter into and figure out how much they might earn upon graduation before you cosign. Some fields have plenty of promise right now, while others offer almost none, and you should know either way before you make any type of financial commitment. Maybe your college student could even spend time improving their credit score so they can qualify for student loans on their own. 

Cosigning on student loans should be a last resort for parents, not an easy fix for students who don’t take time to consider all their options. 

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Cosigning on a student loan can be a huge risk. Here’s everything you need to know how cosigning on your students college loan can impact your personal finances. | #finances #personalfinance #studentdebt


Should I Consolidate My Federal Student Loans? – When It Makes Sense

Federal student loan consolidation can help you manage multiple monthly payments to multiple servicers.

If like the vast majority of college graduates, you acquired student loan debt through federal student aid, you likely have more than one loan, which means more than one bill. Trying to juggle them all can quickly get confusing and even overwhelming as you struggle to keep track of who you owe what and when.

Fortunately, student loan consolidation allows you to combine all those payments into one simplified monthly bill. But while this makes the repayment process easier, consolidation isn’t always a good idea. There are times you should definitely think twice before wiping out your old student loans with a new one.

What Is Student Loan Consolidation?

Consolidating your student loans means combining all your old loans into one new loan. The government issues you a single federal direct consolidation loan in the total amount of your original loans.

The new consolidation loan pays off the original loans, leaving you with only one consolidation loan to repay. So you’ll have one new monthly payment to only one loan servicer — the company that manages your repayment on behalf of the federal government (your lender).

Other than combining your loans, the rest remains roughly the same. You still owe the same amount. And your new interest rate stays about the same as the combined weighted average of all your old loans.

But you will get the chance to choose one of the federal government’s repayment plans, several of which include the option of extending your repayment as long as 30 years. However, if you continue to repay on the standard 10-year repayment plan, not much will change.

When to Consolidate Your Student Loans

The purpose of the direct consolidation loan program is to simplify the repayment process. It also makes many programs for repayment available on otherwise-ineligible student loans. So if you want to make only one single monthly payment, lower your monthly payment, or apply for an income-driven repayment plan, student loan consolidation may be for you.

It’s not right for everyone. But there are certain circumstances under which federal student loan consolidation makes sense.

1. You Want to Make a Single Monthly Payment

Making one monthly payment to a single institution is a popular reason for consolidating your student loans. It also makes consolidation an optimal choice for most borrowers, regardless of their financial circumstances.

Multiple bills from multiple lenders come with different amounts due and different due dates, making it difficult to budget and keep track of payments. It can lead to missed payments and confusion about the total amounts left to repay. If you’d rather worry about only one bill every month, consolidation allows you to do that.

2. You Want Lower Monthly Payments

If you’re struggling to pay your student loans every month, consolidation can make it easier. By opting for one of the repayment plans that allows you to extend the repayment term, you’ll automatically lower your monthly student loan payment. These include extended repayment, graduated repayment, and income-driven repayment (IDR).

Note that each of these comes with different term lengths and repayment requirements. So how long it takes to repay depends on which student loan repayment option you select. It can also depend on the total amount you borrowed, with some programs allowing longer repayment terms for larger loan amounts.

But be aware that this almost always means paying more on your student loans over the long term. Your interest rate won’t go down. It remains fixed for the life of the loan. And when you’re paying the same interest over a longer period, you end up paying a lot more of it.

3. You Want to Qualify for Income-Driven Repayment

IDR repayment plans are the only way to lower your monthly payment while getting access to student loan forgiveness programs, including the Public Service Loan Forgiveness (PSLF) Program.

PSLF allows borrowers who make payments under an IDR plan while working full-time for a public agency or nonprofit to have their loan balances forgiven after only 10 years. That’s the same length of time as the standard repayment plan.

While all federal direct subsidized and unsubsidized loans are eligible for IDR plans, other loans must be part of a direct consolidation loan to qualify. These include subsidized and unsubsidized Stafford loans, federal PLUS loans for graduate and professional students, and federal Perkins loans.

But be aware that if you’ve already made any qualifying payments toward forgiveness on any direct loans, consolidating them with your other loans restarts the process. In other words, you’ll lose credit for any payments you’ve already made.

4. You’re in Default

Most federal student loans go into default when you fail to make payments for 270 days, or roughly nine months. Federal Perkins loans can go into default immediately if you don’t make a payment by the due date.

Once you’re in default, your loan becomes due in full, and you no longer have access to federal repayment programs. You also owe any unpaid interest and any fees associated with collecting on the amount.

Worse, the federal government has extraordinary powers to collect on the amount owed, including garnishing your wages, seizing your tax refunds, and garnishing your Social Security. They can do all of that without having to go through the process of suing you.

There are three ways you can get out of default: pay the balance in full, go through the process of student loan rehabilitation, or consolidate your loans. If you can’t pay the balance in full, consolidation is the fastest route out of default. To qualify, you must make three consecutive monthly payments on time and agree to repay your loans under an IDR plan.

Going this route makes the most sense if you need to get out of default quickly. But note that consolidation will not remove the default line from your credit report. Only student loan rehabilitation can do that.

To rehabilitate your loans, you must make nine monthly loan payments within 10 consecutive months. Your payments must be 15% of your discretionary income. Your discretionary income is the difference between your adjusted gross income from your tax return and a certain percentage of the poverty level for a family of your size in your state of residence. The percentage varies among repayment plans but is generally 150%.

You can only rehabilitate your loans once, so if you opt to do that, make sure you can afford the payments.

When Not to Consolidate Your Student Loans

Student loan consolidation is a suitable strategy for simplifying or lowering monthly payments, but it’s not always beneficial. Consolidation could mean you lose access to certain benefits, and once you consolidate your loans, you can’t reverse them.

Fortunately, you don’t have to consolidate all your loans. You can always keep any loans for which you don’t want to lose certain borrower benefits out of consolidation.

1. You Have a Perkins Loan

Perkins loans were low-interest student loans for undergraduate and graduate student loan borrowers with extreme financial need. It’s no longer possible to get a Perkins loan, as the government discontinued the program on Sept. 30, 2017.

But if you already have one, the repayment plans available for Perkins loans are very different from those for other federal student loans. To learn about options for Perkins repayment, you need to speak with either the school that made the loan or your servicer.

One of the unique options for Perkins loans is the ability to have them forgiven in exchange for working in certain professions in high-need areas. But note that if you consolidate your Perkins loan with your other loans, you’ll lose access to the Perkins loan cancellation program. That’s because if you consolidate your loan, you no longer have a Perkins loan. You have a federal direct consolidation loan.

2. You’ve Been Paying Under an IDR Plan

Only direct loans qualify for most IDR plans, with the single exception of income-based repayment, which allows income-based repayment on Stafford loans. So consolidating your loans will give you access to all the IDR programs if you have any non-direct loans.

However, if you’ve been paying on any direct loans under an IDR plan, if you consolidate them into a new loan, you lose whatever progress you’ve made on them. That’s because the old loan no longer exists.

For example, let’s say you’re attempting to qualify for PSLF, and you’ve made one year of payments on one of your direct loans under an IDR plan. That means you only have to make another nine years of payments on that loan before you could qualify to have your balance forgiven.

But you have other student loans. So you decide to consolidate all your loans together and put them all into IDR to work toward PSLF. If you do that, you lose credit for all the payments made on that first loan, and the clock resets to zero. That means 10 more years of payments on that loan, not nine.

The best thing to do in this case is keep the original loan off the new direct consolidation loan application while consolidating the rest so they also qualify for PSLF.

3. You Have a Parent PLUS Loan

If you borrowed for your own education and are still paying on those loans along with a parent PLUS loan you took out to help pay for your child’s education, don’t consolidate them.

You’ll lose eligibility for all repayment options except for income-contingent repayment (ICR), which is the least favorable of the IDR programs. ICR’s calculation for discretionary income allows less room, and monthly payments are calculated as a higher percentage of your discretionary income.

Also, while both students and parents can consolidate their loans, students and parents cannot consolidate theirs together. You can only consolidate your own loans.

4. You Want to Consolidate Private & Federal Loans

You can only consolidate federal loans through the federal direct consolidation program. If you have private loans you want to consolidate with your federal ones, the only way to do that is through refinancing.

Refinancing is like consolidation in that all your current loans combine into a single loan. However, the money comes from a private lender, not the federal government.

Plus, refinancing has its drawbacks. It can be tough to qualify, as your credit score needs to be impeccable. And if you refinance your government loans along with your private loans, you lose access to all the government repayment programs because you don’t have a federal loan anymore (it’s a private one). That includes IDR and more generous forbearance and forgiveness terms.

5. You Want to Save Money on Repayment

Although consolidation simplifies payment and can even reduce your monthly payment, you’re not likely to save any money in the long run by consolidating your loans.

First, your interest rate won’t be any lower after consolidation. The rate on your new consolidation loan is the weighted average of the interest rates of all your old loans rounded up to the nearest one-eighth of 1%. That means it stays roughly the same as it was before.

Second, if you opt for any repayment term longer than the standard 10-year plan, you could be looking at paying thousands or even tens of thousands more over the life of the loan thanks to accruing interest.

Third, any unpaid interest on your loans is capitalized with the principal balance at the time of consolidation. That means it’s added to the original balance, so you end up paying interest on a new, higher balance with your consolidation loan. In other words, you pay interest on top of interest.

If you’re able to qualify, refinancing is the only way to both consolidate all your loans and save money on repayment. Private student loan refinancing lenders such as SoFi stay competitive with each other by offering the lowest interest rates. A lower interest rate on your loan means you repay less overall and your monthly payment could even be lower. But always be cautious about refinancing federal loans, as it means losing access to federal programs.

Final Word

Figuring out the best way to pay back your student loans can be complicated. It involves weighing the repayment plan that will give you the best long-term savings against your ability to manage your life and student loan debt today. Compounding the situation, it may take college graduates a while to find a job, and entry-level work isn’t often well-paying once they do.

Thankfully, there’s a variety of programs available to make repayment of federal education loans easier. Even better, you aren’t locked into most of them. When your life or income changes, you can always opt to switch to a different repayment plan.

But that’s not the case with consolidation. Once you consolidate, it’s irreversible because your old loans are effectively gone. So think carefully before consolidating and make sure you understand what it will mean for you and your future.


What Is a Parent PLUS Loan?

Parent PLUS Loans | Are They Right for You? – SmartAsset

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Paying for college is a challenge, and rising tuition costs certainly don’t help. According to College Board, the average cost of a four-year private college has increased by more than $3,000 over the last five years. Scholarships, grants and work-study programs can help bridge the gap, but it’s best to have a robust savings to back you up. Since some parents don’t want their child to take on too many loans themselves, the federal government created Parent PLUS loans. They stand out from other programs thanks to a fixed interest rate and flexible repayment options. Here we discuss what exactly a Parent PLUS loan is, how it works and whether you should get one.

Parent PLUS Loans Defined

Let’s start with the basics. A Parent PLUS loan is a federal student loan offered by the U.S. Department of Education Direct Loan program. Unlike other Direct Loans and most student loans in general, Parent PLUS loans are issued to parents rather than students. Also eligible for issue are stepparents, dependent graduate students and other relatives.

Whoever takes out the loan holds the sole legal responsibility for repayments, regardless of personal arrangements. This is very different than a parent cosigning his or her child’s student loan. The maximum PLUS loan amount is the cost of attendance minus any other financial aid received, which could equal tens of thousands of dollars per year. For PLUS loans distributed between July 2018 and July 2019, the interest rate is 7.60%. As such, the decision to get a Parent PLUS loan should not be taken lightly.

Who Should Get a Parent PLUS Loan?

According to the Office of Federal Student Aid, about 3.5 million parents and students have borrowed a collective $83.9 billion using Parent PLUS Loans from the federal government. To qualify for a Parent PLUS loan, you must be the parent of a dependent undergraduate student, dependent graduate student or professional student enrolled at least half-time in a participating college or university.

You and your child must also meet the general eligibility rules for federal student aid, such as proving U.S. citizenship and demonstrating need. Male students must be registered with the Selective Service. As with other Direct PLUS loans, you usually can’t secure a Parent PLUS loan if you have an adverse credit history. The Department of Education won’t approve a borrower with charged-off accounts, accounts in collections or a 90-day delinquent account with a balance of $2,085 or more.

You shouldn’t apply for a Parent PLUS loan just because you qualify. In fact, it’s usually best if a student gets all of the Direct Loans he or she is eligible for first. These loans tend to have lower interest rates and fees. A parent could always help his or her child with student loan repayments, anyway.

You should really only apply for a Parent PLUS loan if your child needs more financial aid than he or she has received from other sources. It’s also important that both students and parents are on the same page about expectations and repayment plans.

Pros of Parent PLUS Loans

Flexible Loan Limits

Identified generally as “cost of attendance minus any other financial aid received,” Parent PLUS loans can be used toward tuition and fees, room and board, books, supplies, equipment, transportation and miscellaneous personal expenses. They do not have the same limits imposed on them as other federal student loans do. This makes Parent PLUS loans a great supplement if you have a mediocre financial aid package. Of course, you should still be cautious not to take on debt you won’t be able to pay back. Our student loan calculator can help you decide how much you should borrow.

Fixed Interest Rate

As with other federal student loans, the interest rate on a Parent PLUS loan stays the same throughout the life of the loan. It won’t alter based on national interest rates, the prime rate or other factors. Every July, the Department of Education sets the Parent PLUS loan interest rate based on that year’s 10-year treasury note. The fixed interest rate makes it easy for borrowers to predict expenses, make both short- and long-term financial goals and set a budget.

Multiple Repayment Options

Parent PLUS loans are eligible for several different repayment plans, one of which should work for you. This flexibility makes them one of the most accommodating programs for funding a college education. Check out your choices below:

  • Standard Repayment Plan: The most common option, which allows for fixed monthly payments for 10 years.
  • Graduated Repayment Plan: This starts with small payments that gradually increase over 10 years. In theory, this should coincide with growing income levels.
  • Extended Repayment Plan: This provides fixed or graduated payments over 25 years, as opposed to 10.
  • Income-Contingent Repayment: Borrowers pay 20% of their discretionary income or what they’d pay on a 12-year plan, whichever is lower. They also qualify for student loan forgiveness if they still have a balance after 25 years.

Cons of Parent PLUS Loans

Loan Origination Fee

Interest isn’t the only expense you’ll encounter with Parent PLUS loans. There’s also a loan origination fee. The fee amount is a percentage of the loan, and it varies depending on the disbursement date of the loan. For loans after October 1, 2018 but before October 1, 2019, the fee is 4.248% of the loan amount. That means that if you borrow $30,000 using a Parent PLUS loan, you’d pay a fee of $1,274.40.

This fee is proportionately deducted from each loan disbursement, which essentially reduces the amount of money borrowers have to cover education-related costs. Since many private student loans don’t have a fee, it’s worth looking into private options to determine which loan has the lowest borrowing costs.

Relatively High Interest Rate

Currently set at 7.60%, Parent PLUS loans certainly don’t have the lowest rate out there. If you have strong credit and qualify for a better rate, you might consider a different loan that will cost less in the long run. Direct Subsidized Loans currently carry a 5.05% interest rate, while Direct Unsubsidized Loans are at 6.60%. On the other hand, some private lenders have interest rates as low as 2.795%.

Limited Grace Period

Parent PLUS loan repayment normally begins within 60 days of loan disbursement, but borrowers have the option to defer repayment. This will last while their child is still in school and for six months after he or she graduates or if the student drops below a half-time enrollment status. Not only is this much less time than borrowers of other loan programs receive, but interest will also continue to accrue during the deferment period.

How to Apply for a Parent PLUS Loan

If a Parent PLUS loan seems right for you, file the Free Application for Federal Student Aid (FAFSA) at Depending on the school’s application process, you will request the loan from or the school’s financial aid office.

If you receive approval for a Parent PLUS loan, you will get a Direct PLUS Loan Master Promissory Note (MPN). You’ll have to review and sign the MPN before sending back. Funds are typically sent straight to the school, but you or your child may receive a check. All of the money must be used for educational and college-related purposes.

Tips for Your College Finances

  • Every state in the country offers one of more higher education tuition assistance programs called 529 plans. For many prospective college students and their families, this may be one of the best ways to overcome the incredibly high costs of a university degree. What’s better yet is that you can get a plan from any state, not just the one you reside in.
  • It’s extremely common for financial advisors to have some level of background knowledge in funding for higher education. The SmartAsset financial advisor matching tool can pair you up with as many as three such advisors in your area.

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Liz Smith Liz Smith is a graduate of New York University and has been passionate about helping people make better financial decisions since her college days. Liz has been writing for SmartAsset for more than four years. Her areas of expertise include retirement, credit cards and savings. She also focuses on all money issues for millennials. Liz’s articles have been featured across the web, including on AOL Finance, Business Insider and WNBC. The biggest personal finance mistake she sees people making: not contributing to retirement early in their careers.
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