Grandparents who want to help their grandchildren with college costs can cosign for private student loans on their behalf. Anyone who meets a lender’s requirements can cosign a loan. But should a grandparent cosign a student loan?
Cosigning means the primary borrower and the grandparent cosigner are equally liable for the student loan debt. If the borrower defaults, the grandparent could be held responsible for the balance. Having to pay off cosigned student loans could affect their ability to enjoy a comfortable retirement.
Students and grandparents should understand the types of student loans that can be cosigned, application requirements, and the pros and cons of taking out cosigned loans for college.
In this guide:
- What types of student loans can a grandparent cosign?
- What requirements need to be met by a grandparent to cosign?
- Should a grandparent cosign a student loan?
- How to protect yourself when cosigning
What types of student loans can a grandparent cosign?
Many students look to federal student loans first since these loans offer advantages like low, fixed interest rates and income-driven repayment options. Federal loans do not require a cosigner, though PLUS Loans involve a credit check.
The PLUS Loan program allows parents to borrow on behalf of eligible students. Generally, grandparents are not allowed to take out PLUS Loans on behalf of their grandchildren. The exception is if the grandparent has legally adopted the dependent student.
However, grandparents can cosign private student loans. Private lenders typically look for cosigners with sufficient income or assets and good credit history. As long as a grandparent meets the lender’s requirements, they should be able to cosign a loan.
What requirements need to be met by a grandparent to cosign?
Every private student loan lender has different requirements for who can cosign loans. In general, cosigners must:
- Be U.S. citizens or permanent residents
- Be employed or meet minimum income requirements
- Meet minimum credit score requirements
- Have a positive credit history
- Be current on credit accounts
- Have sufficient savings or assets
Lenders look at these factors to assess and manage risk. If a student takes out a loan with a cosigner, then defaults on the loan, the cosigner is legally obligated to pay. The lender assesses credit history, income, and assets to determine whether a cosigner would be able to pay off the loan if necessary.
Lenders may look closer at a grandparent’s income, which could be a barrier to cosigning a loan.
Can a retired grandparent cosign a student loan?
If a grandparent is retired, they’re not collecting paychecks from a job. Instead, their sources of income may be Social Security benefits, 401(k) and IRA withdrawals, dividends from investments, payments from annuities, or reverse mortgages.
As long as that income is reliable or a grandparent has sufficient assets, the lender may allow them to cosign. The lender may also consider their debt-to-income (DTI) ratio to gauge how much of their income goes to paying mortgage debt, credit cards, or other debts.
Grandparents living on a fixed income in retirement are not barred from cosigning private student loans. The higher their income and the lower their expenses, the easier it may be to get approved to cosign a private student loan.
Should a grandparent cosign a student loan?
Cosigning can help students qualify for the loans they need to pay for school. Students may be granted a lower interest rate when applying with a cosigner who has a strong credit history.
But cosigning student loans has risks. Grandparents need to understand what happens to cosigners if the student defaults on the loan.
Lenders can take collection actions against the student and the cosigner when default happens. Under the law, cosigners bear the same responsibility for the debt as the student. Some consequences of default on a cosigned loan include:
- Credit score damage. Private lenders can report student loan accounts that are in default to the major credit bureaus. Negative account history can also show up on the cosigner’s credit report.
- Collection calls. When payments stop coming on a cosigned loan, the lender can contact the student and the cosigner. That means grandparents may receive collection calls or letters demanding payment.
- Civil lawsuits. If collection efforts are going nowhere, a private lender may file a civil claim against the student and their cosigner. Judgments on a credit report can do more credit score damage.
- Garnishments or liens. Once a lender wins a judgment against a borrower or a cosigner, they can enforce the judgment according to state law. They may be able to garnish wages, garnish bank accounts, or place liens against property.
Before cosigning student loans, grandparents should consider whether they’d be able to make the payments on the loans if their grandchild defaults.
Say a grandparent cosigns $40,000 in loans with a 10% APR. The monthly payment on those loans is $529, assuming a 10-year repayment plan. Having to come up with an extra $500 per month to pay off loans could strain their retirement budget, especially if they’re spending more on health care as they age.
Aside from default, there are other scenarios where grandparents might be left holding the bag on cosigned loans. If the primary borrower becomes disabled or dies, the loan debt might not disappear. While many private student loan lenders offer automatic discharge in case of death or disability, not all do.
What happens to a retired grandparent on Social Security if their grandchild defaults on the loan?
The good news is that Social Security benefits are protected from creditor collection actions. If a student defaults on cosigned loan payments, the lender cannot garnish their grandparent’s Social Security benefits. Instead, the lender can go after the grandparent’s unprotected income and assets to recoup what’s owed.
More downsides to grandparents cosigning student loans
Cosigning loans could affect a grandparent’s ability to enjoy the kind of retirement they want. Seniors with student loans are more likely to skip necessary health care such as doctor visits, prescriptions, and dental care because they couldn’t afford it, according to the Consumer Financial Protection Bureau (CFPB).
The cons outweigh the pros when you compare the negative consequences of cosigning student loans against a desire to help a grandchild pay for school. While it’s ultimately up to you to decide what’s best for your situation, it’s important to understand the financial responsibility that goes along with cosigning.
How to protect yourself when cosigning
Cosigning a private student loan for a grandchild can make all the difference in them affording a college education, but be cautious in doing so. Read the fine print regarding the definition of default, which could vary by lender.
Review which legal actions the lender can take against the borrower or cosigner in case of a missed payment. You should also look into the terms regarding the event of death, disability, or bankruptcy.
It is essential to check if there are prepayment penalties with private student loans. Lenders can charge prepayment penalties to recoup lost interest when a borrower pays a loan in full ahead of schedule.
Finally, ask about cosigner release. Many lenders offer cosigner release once the primary borrower makes a certain number of on-time payments. Knowing that you may be able to get released from your obligation to the loans might offer some peace of mind if you decide to move ahead with consigning.
>> Read More: Do you need a cosigner for a student loan