Student Loan Basics: What Parents and Cosigners Need to Know
If a student in your life did not receive enough financial aid to cover the full cost of attendance for college, he or she may turn to you for financial help. If you are considering taking on a federal parent loan or cosigning a private student loan with your student, consider these important points.
1. Student debt is a financial decision.
You are likely emotionally invested in wanting to see your student succeed in college, but it’s important to remember student loans are a financial product and require objective, not emotional, consideration.
2. You are financially liable for the debt.
If you take out a federal Parent PLUS Loan, you are taking on the debt yourself. Carefully consider the repayment terms, interest rate and fees you may face.
If you are considering cosigning a private student loan, be aware that you will be responsible for payments if your student doesn’t make them. Late payments, delinquency and default will affect your credit.
3. The total repayment amount will be more than the loan amount.
Student loans generally accrue interest every day. Interest may also capitalize at certain times, such as when the student graduates or a period of assistance ends. This means accrued, unpaid interest will be added to the principal balance. In addition, you may have origination, late or other loan fees incorporated into the total repayment amount.
4. The responsibility can last as long as the loan term.
Student loans are not typically discharged in the event of bankruptcy or other circumstances. In addition, if your student doesn’t graduate, earn as much as anticipated after graduating or obtain the anticipated career, the debt doesn’t go away. If the loan has been disbursed, cosigners are equally responsible for payment.
Many lenders offer a cosigner release. If you are counting on being released from your obligation to repay the debt, pay careful attention to the requirements for obtaining this benefit. Your student will likely need to make a certain number of on-time payments and meet other conditions before cosigners are eligible for release.
5. Your circumstances may change before the debt is repaid.
If your child or grandchild is entering college now, consider how your income may change before the end of the anticipated loan term. Will you still be working or will you be stretching a retirement income to cover any payments? What happens if you or your student loses a job?
6. You can help your student successfully repay debt.
Preparing your student to fulfill his or her obligations for a cosigned loan or taking on PLUS Loan payments (if that is your and your student’s understanding) is an important step.
- Research loan options. Consider interest rates, terms and fees, available repayment assistance in the event of hardship, borrower benefits and potential starting salary when thinking about your loan options.
- Understand potential starting budget. It’s easy for an incoming college student to overestimate how much a starting career will pay and underestimate other expenses when they consider the cost of college and their ability to repay debt after graduation. Together with your student, go through ROCI Reality Check to see starting salaries and job outlook by specific major to gain a realistic view of life after graduation.
- Monitor college success. Good grades, valuable job and internship experiences and appropriate career preparation can all help your student have an advantage in the job search. You can help your student position him- or herself for a starting salary that will allow manageable loan payments.
- Make your plan. Experience the parent version of Student Loan Game Plan for tips and information on how to work with your student to ensure success.