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You've watched your children or relatives celebrate college graduation, move to new cities and start first jobs. You might be settling into life with an empty nest, or simply enjoying one less person in the house.
That is, until your child brings up student loan refinancing and asks if you will help by co-signing.
Student loan debt in the United States has climbed to more than $1.48 trillion, a record amount. The average student loan debt for the class of 2017 was nearly $40,000, according to Student Loan Hero, an online resource for managing student and personal debt. This represents a huge financial burden for 44.2 million Americans and can take years to pay off.
Currently, interest rates on private student loans range from about 3 percent to about 12 percent, depending on the type of loan and the lender. Interest rates on federal loans and are between 5.05 percent and 7.6 percent for the 2018-19 school year, according to the office of Federal Student Aid. The top picks for student loan refinancing from Student Loan Hero offer interest rates between 2 percent and 9 percent.
For some, refinancing a student loan with a lower interest rate can be a great way to save money and finish paying off debt faster. Those who are steadily employed, usually in professional careers, are able to apply and be approved on their own. For others, most refinancing lenders will allow co-signers to help applicants.
“Generally, refinancing your student loans is just the first step on the journey out of student debt,” said Anna Khayet, director of product marketing, student loans at SoFi, an online personal finance company.
For people who are looking to refinance, having a co-signer makes approval easier and may mean they are offered a lower interest rate. For those asked to co-sign, there is more to consider.
If someone has asked you to co-sign a student loan with them, here are a few things to think about.
“I recommend finding a co-signer who has good credit and good income to maximize your chances of getting a low rate,” said Khayet from SoFi.
Even a quarter of a percentage point could have a significant impact on much you ultimately pay. The faster you pay off your loans, the sooner you can move on to your next goal, Khayet said.
With the co-signer’s financial information on an application, lenders will look at the student as “less credit risky,” said Zack Friedman, founder and CEO of Make Lemonade, a free personal finance comparison site.
“Whenever we’re in an environment when rates are starting to rise, it can make sense to refinance,” said Miranda Marquit, financial expert and senior writer at Student Loan Hero. “You never know what’s going to happen with the economy but if you can get a lower rate now, you have a lower rate.”
While helping a child or other relative get a lower rate may feel great, it’s important to remember that you’re offering up your financial information to help them. There is no added risk for the person bringing you on as a co-signer, but there could be consequences for you.
As a co-signer, you’re accepting joint responsibility for the loans if the student does not pay on time or the full amount.
Co-signers “are pretty much putting it on the line,” said Marquit from Student Loan Hero. “You have to think hard – be really honest with yourself about if you can trust them to make these payments.”
You should only co-sign for someone who has a proven history of solid financial decisions. Marquit says to look at things like rent, car payments and job history. If they have a steady job and have paid those things on time, that’s an indication that they will keep going.
If you have any doubts that the person will not pay the loan back, or they already exhibit poor financial behavior, it’s in your best interest to say no to signing on with them. It might be awkward, but will keep you from potentially having to pay the loan yourself.
“If you’re worried about the person making those payments and you’re not willing to pay it for them, then don’t sign that loan,” Marquit said.
“When you co-sign on somebody’s loan that shows up as credit you’re using,” Marquit said. That can impact your ability to get credit later, even if you’re not the borrower, she said.
This can have other effects on your overall financial health. Marquit said that co-signers should assess the burden of the loan against their other financial goals. Are you approaching retirement? Do you have other younger children going to college? Depending on what else is going on in your life, it might not be feasible to co-sign.
“The good news is that some student loan lenders offer a co-signer release, which means that after you are approved for student loan refinancing, you can have the co-signer removed from your loan after you meet certain qualifications set by the lender,” said Friedman from Make Lemonade.
A co-signer release, and the terms of release, is something that potential co-signers should consider, especially if the student asking for help has years of loan payments ahead of him or her. Having this release option will help the student secure approval and a lower rate to refinance, but will let you off the hook eventually.
This might be a good compromise for people who want to help with student loan refinance, but don't want to be equally responsible for the lifetime of the loan.
“If you play it smart, you can use a co-signer to help you get approved and get a lower rate and then go off on your own,” Friedman said.
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