Cosigning a student loan is an increasingly necessary promise to support the successful future of the ones you love.
According to the Consumer Financial Protection Bureau, over 90% of private student loans had a cosigner. The same bureau estimated that the combined total for outstanding student loan debt had already reached nearly $1.2 trillion, back in 2013.
So how can you best help your millennial achieve their educational, career and life goals?
Good Communication is Key
Co-signing a loan creates serious financial commitments for the borrower and the co-signer. Since both parties are responsible for repayment on the debt, it is important to clearly define and communicate your expectations with each other.
Start by having an honest conversation with the borrower to determine their goals and what they hope to achieve from their education. Help them define their career objectives and create a realistic projection of their post-graduation income. This will help you find a balance and determine your cumulative ability to repay the debt.
If their career of choice is not in the top income bracket, there is no need to lose hope.
Millennials are Good with Money
Millennials have better financial habits than previous generations. A 2015 study found that 75% of millennials track their expenses carefully, compared to 64% among baby boomers. In fact, the same study found that 67% of millennials stick to a budget while baby boomers lagged behind at only 55%.
“When [millennials] have the means to do the right thing, it appears that they often do,” stated Anne Coveney, a senior manager at T. Rowe Price. “They are exhibiting financial discipline in managing their spending and are defying stereotypes that this generation is prone to spend-thrift, short-sighted thinking.”
Millennials are also more willing to seek help in a financial emergency. This generation is far more likely to approach family and friends for help (55% vs. 17%) and to use credit cards if in financial crisis (57% vs. 43%), according to T. Rowe Price.
Considerations Before You Sign
If you are contemplating cosigning a student loan, consider the following tips before jumping on-board:
Take stock of your own finances. Cosigning a student loan for someone else adds a new debt for you too. If you’re planning on applying for a loan or refinancing a mortgage in the next six months, know that this loan could have a negative impact.
Purchase death and/or disability insurance. Co-signing a loan makes both parties responsible for the debt in its entirety if either party dies or becomes disabled and unable to pay. While uncomfortable to consider, the alternative of having debt payments added to the already stressful grieving process in case of a tragedy should be considered.
Ensure basic understanding of how credit works. Everyone signing the loan should fully understand the impact of late payments. The borrower needs know how a default will affect their credit score and their ability to qualify for future loans. Even a single payment that is 30 days or more delinquent could take 90 to 110 points off your credit score for many years.
See if the creditor will negotiate your liability. It’s worth asking if creditors will limit a co-signer’s liability to only the principal on the loan. If this proves to be the case, have the creditor to include a statement to this effect in the contract before you sign.