Many young people are unable to get private student loans without a cosigner. Their parents may step in to help them get the loans the need, but end up putting their own financial security at risk. Here are some things you should think about when weighing the pros and cons of co-signing for student loans.
Federal vs. private student loans
Your kid should always apply for federal student loans before turning to private loans. Federal loans such as the Perkins or Stafford are not based on credit scores, so there is no credit check. Students also do not need a cosigner to qualify for federal aid. However, private student loans do require a credit check, and your student probably won’t qualify without a cosigner. Depending on the lender the borrower may be required to get a cosigner even with a healthy income and credit score.
Parents’ financial profile
As a parent you should ask some questions about your financial situation–now and in the future. Use the following questions as a starting point:
- Do you have a lot of credit card debt and other bills?
- Are you having trouble making your mortgage payments?
- Are you worried about your future job security?
- Have you experienced a recent drop in income?
- Is it difficult to make your income stretch between paychecks?
- Have you saved a substantial amount for retirement?
Do you need debt help?
If you are already struggling to handle all your household expenses, co-signing for a student loan is probably not a good idea–if you can even qualify. If Junior defaults on a loan, as the cosigner you would be responsible for paying it back. Many recent graduates are coming out of school with no job prospects in sight, and that could happen to your kid as well. So think about whether heaping a student loan payment on top of all your other obligations would push you to a financial breaking point. If your finances are too out of control, it may be time to get help with debt from a debt counseling firm.
Consumers in the U.S. are still in financial distress, but their overall financial situation seems to be improving. The CredAbility Consumer Distress Index tracks the financial condition of the average U.S. household each quarter. CredAbility, a nonprofit credit counseling firm, measured employment, housing, credit, how households manage budgets and net worth.
Index score rises
U.S. households had a score of 68.1 on a 100-point scale in the first quarter of 2011, which was up from 67.2 the previous quarter. It was the highest score since the financial crisis escalated in the third period of 2008. A score below 70 indicates that households are experiencing financial distress.
However, many consumers are getting their acts together and improving their finances. For instance, many people are doing better at managing their household budgets. They also are showing some improvement in debt management, reflected in the fact that there were fewer bankruptcy filings, which fell 6 percent from the year-earlier quarter.
“The good news is that the full-time labor force grew by more than 540,000 people in the first quarter and consumers with stable incomes have a handle on their credit and household budgets,” said Mark Cole, chief operating officer for CredAbility and author of the report. “While the housing category continues to deteriorate, a gain of four points in the index during the past five quarters indicates that the majority of consumers are on the right track.”
Distressed southern states
Some areas of the country fared better than others. North Dakota (82.35) and South Dakota (81.23) were the states with the highest individual scores. Overall those two states have not been hit as hard by the economic crisis as some other parts of the country. Six states in the Southeast were among the 10 most distressed states in the country.
Help for your household
If you find yourself feeling overly stressed by credit card debt and other bills, it may be time to get help with debt. Consider finding a reputable debt counseling firm to work with you to better manage your household budget.