It’s no secret: college is expensive, and the cost is only rising.  The price of an average four-year degree is out of reach of most Americans — without the assistance of student loans.  For most prospective and current students, student loans can help bridge the gap between savings, scholarships, grants, work study and the often sky-high expense of tuition, fees, room and board.

Types of Student Loans

There are two types of student loans available: federal student loans and private student loans.  Federal student loans are offered through the United States Department of Education and are not based on the creditworthiness of the borrower.  That means that students can take out the loan in his or her own name — and they are responsible for the debt.  However, there are limits on the total amount of federal loans that a student can borrow, which is why many students turn to private student loans.

Unlike federal student loans, private loans are made available based on the creditworthiness of the borrower. Most private sector banks will not approve loans to borrowers without a strong credit history which is a big problem for college students who desperately need funding. If they do offer loans to these applicants, it will typically be at a higher interest rate than federal loans.  Borrowers can become eligible for private student loans by asking an adult — usually a parent, grandparent, other family members, or friend — to cosign the loan for them.  A cosigner is a person who agrees to take on the student loan debt if the primary borrower fails to pay it. Parents usually get dragged into the equation when college students are unable to obtain a private student loan without a cosigner.

Is Cosigning a Good Idea?

Most parents would co-sign student loans for their children without thinking twice.  After all, if it’s the only way that your child can attend the school of their dreams, why wouldn’t you do it?  But co-signing student loans can seriously jeopardize your own financial stability — which is why you should avoid cosigning at all costs.

When you cosign a student loan, you are putting yourself on the hook for that debt.  If your child is unable to make his or her student loan payments, you will become fully responsible for the entire balance of the loan.  It does not matter if there is a really good reason why your child cannot pay the debt, like that he or she died or became disabled; if the loan goes into default, the lender will look to you to make the payments.

What Are The Risks?

Even if your child is incredibly responsible, an unexpected event could occur that would place the burden of student loan payments on your shoulders.  There is also the possibility that your child will not be able to get a job in his or her chosen field — or to get a job that pays enough to cover the payments.  If you cosign a student loan and your son or daughter can’t make those monthly student loan payments, you become responsible for them.

You should also consider that student loans are different than other types of debt.  They typically cannot be discharged in bankruptcy, and student loan lenders can garnish your social security or seize your tax returns to get their payments. These factors mean that if you become responsible for your child’s student loans, there will no way to avoid paying for them.

When you cosign your child’s student loan, you are putting your own financial health at risk.  That is because cosigning a student loan puts your name on a debt.  If your child is late or misses a payment, that will be reflected on your own credit history and can drive down your credit score.  It will also impact your own net worth, as your debt-to-income ratio will now list the student loan as one of your liabilities — making it harder to qualify for a mortgage, car loan or another type of loan if you need one.

Finally, cosigning a loan can create problems within your family.  If your child is missing payments or late on payments, that will create tension in your relationship.  You can avoid that dynamic by not co-signing student loans, and allow them to be responsible for their own student loans.

What are the Alternatives? 

While it may be tempting to take on student loan debt by cosigning a loan for your child, the reality is that becoming a cosigner is a serious decision that can impact your financial security for years to come.  It can damage your credit, create problems in your family, put your retirement at risk, and leave you paying a substantial debt.  If your child cannot pay for college without private loans, consider other options. Here are some ideas:

• Take a year off to save up money
• Choose a less expensive college
• Apply for more scholarships & grants
• Contribute some of your current savings to your child’s education
• Open a 529 savings account

There are any number of ways that you can help your child as he or she heads off to college; one way to help is to teach them about finances before they need to leave the nest. For a more in-depth analysis of student loans click here.

Elaine Lawrence is a CFP from San Antonio working to help students and their families better understand the dangers of students loans and pay for college in a more safe and efficient way.