Helping a child pay for college is a big decision – but before agreeing to take on student loans, it’s important to understand when parents are legally responsible for repayment. The answer largely depends on the type of loan. Here’s what to know before you commit.
Are parents responsible for student loans?
In most cases, parents are not automatically responsible for student loans. However, you may become legally obligated to repay the loan if you borrow money in your own name or you co-sign a private student loan.
Types of student loans:
Federal Stafford loans
A Federal Stafford loan is a federally backed and administered loan that usually comes with a low interest rate, making it attractive for students and parents. When the time comes to start making payments, only the student is obligated to repay these loans – not the parents. In fact, there’s no co-signer. If the student defaults on a federal student loan, it will affect the student’s credit and won’t be reported on the parent’s credit history.
Federal Parent Direct PLUS loans
Parents of eligible undergraduates can apply for the Parent Direct PLUS program to cover the remaining costs after other financial aid. The student just needs to complete a Free Application for Federal Student Aid (FAFSA). A parent PLUS loan can’t be transferred to the child. In other words, the parent borrower is legally responsible for the loan.
Some families will create a side agreement for repayment. But remember, under the PLUS program, any lower payment, forgiveness or deferment options will be based exclusively on the parent borrower’s situation – even if it’s the student who makes payments back to the parents.
Co-signing a private loan
Most private student loans require co-signers, such as a parent or guardian. A co-signer helps in many ways — mainly by increasing the chances of getting the loan and by scoring a lower interest rate. But the co-signer is also responsible if the student is unable to repay the loan. It will also go on the co-signer’s record and count toward student loan debt, which means it can also affect their credit score.
“Co-signing is essentially identical to taking on the loan itself; if it's not paid, your credit will be ruined and you can get hammered by debt collectors,” says Rohit Chopra, a senior fellow at the Center for American Progress.
Even if the payments are made on time, the co-signed loan will still show up as an obligation on the co-signer’s credit history.
What to do if you struggle to repay a loan
If you find yourself falling behind on a loan, it can dent your credit score – as loans considered delinquent are typically reported to three major credit reporting agencies. If you fall further behind, your loan may go into default and debt collectors could start contacting you. Before you get to that point, contact your lender, explain your situation and ask about loan repayment options or the potential for loan:
- Refinancing
- Deferment
- Consolidation
- Forgiveness
Do your homework on student loans
Using student loans for a child’s education may be the right choice for your family. Make sure you find out who’s responsible for what – and when. And check out this student loan payment calculator to understand your costs before making a loan commitment.