Cosigning For Your Kids
My daughter recently informed me that she is applying for a student line of credit – and needs me to co-sign the loan. What are the pros and cons of co-signing this loan, and is this something you would recommend?
Thunder Bay Ontario
Thanks for the question. When it comes to our kids, most parents are willing to do almost anything to help them through their post-secondary years. However, many parents should consider the financial risks involved in co-signing student loan applications.
In terms of helping to finance your daughter’s education, a student line of credit can be a very helpful financial tool. They are available through almost all financial institutions, typically have low interest rates (Prime + 1%), and only require her to pay interest on the amount borrowed while still in school. That being said, it’s important to note that within eight months of graduating (or ending her studies) you daughter will be required to begin making regular payments of principal plus interest.
My concern with parents co-signing these types of loans has less to do with wanting to help your child succeed and more to do with the child’s ability to manage the financial responsibility. Most students have very little exposure to financial planning or management before heading off to college or university – and often find themselves in over their heads when it comes to student debt.
Before agreeing to co-sign this loan you need to be aware that if your daughter fails to make her monthly interest payments, or misses a few payments, you become legally responsible for paying the loan and could potentially put your own financial future at risk. While it may be her loan, any missed or late payments may be recorded to your credit report, resulting in the potential of a poor credit rating for you.
While there are both pros and cons to student lines of credit, you are really the only person who can decide if cosigning is the right decision – for both you and your daughter. Before heading to the bank and filling out an application, I would recommend using this as an opportunity to engage your daughter in an open conversation about finances. Consider asking some of the following questions to gauge her understanding of the financial responsibility.
- Why does she need a student line of credit?
- Is it to pay for tuition or cost-of-living while she is in school?
- How does she plan to make her monthly interest payments?
- How does she plan to pay back the loan once school is complete?
University and college can be one of the most exciting times in a young person’s life – but it can also be a recipe for a financial disaster. Whether you decide to co-sign the loan or not, taking the time to teach your kids basic budgeting and financial management skills can go a long way in preparing them for the journey ahead.
I recommend taking a look at Budgeting 101: Your Money Guide for Getting Through School. This free resource is full of helpful tips and exercises to help your student live on a budget and avoid piling on too much debt while in school.
Jeffrey Schwartz is the Executive Director of Consolidated Credit Counseling Services of Canada and President of the Credit Association of Greater Toronto (CAGT).
If you have a question about a debt management program or just about finance in general, Jeff is here to help. Send us an email with your question to [email protected]. You’ll get the expert advice you need and your question may be featured here on our website.