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Step 1
LOOK AT YOUR OPTIONS - Are student loans your child's only options? Does he/she have work study or private loan options that they can put in their own name? Can he/she pay the extra finances he/she needs for tuition with a payment plan to the University?
It is vital to at least KNOW your other options when assessing risk in regards to co-signing on student loans. These options will make it easier for you to decline to co-sign while still supporting your child in his/her education goals. -
Step 2
ASSESS YOUR CHILD'S RISK FACTORS - How likely is your child to stay current on the loans? Does he/she have past successes with finances? Past failures? How is/her job history? How important is it to your child that he/she keep a promise? Have they kept their word in the past?
Obviously, you will not be able to KNOW whether your child will stay current to the student loan or honor it, but you can make a good guess to your child's character.
Ex: In my scenario, I have had horrible debt problems despite the fact that I was a straight A student in high school, won scholarships and got into a great college. Although, I have defaulted on some loans or credit cards, I never would be late on something that my mother or father co-signed for because I understand the consequences.
Would your child give you that respect? If not you should NOT co-sign their loan? Will your child tell you if they are in trouble? If not, there can be some reason for concern. -
Step 3
ASSESS YOUR OWN OPINIONS ON EDUCATION - Even weighing the risks of co-signing for your child's student loans may feel like a betrayal in your heart. But, it is not. You can support your child's education in many ways and there are many other opportunities for funds (as discussed in step 1).
If your student does mess up financially, you want to be in a situation to help him/her out. If you co-sign and no longer have good credit, you will both be in a poor situation and you may not be able to help him/her out when they are a little older, have learned their lessons and need a co-signer for a car/house. -
Step 4
CREATE A PAYBACK PLAN WITH YOUR STUDENT - If you decide you are going to co-sign for your student, you will need to create a plan to minimize the risk of failure and increase the chances of success.
This plan should start with a thorough review of the risks of co-signing a student. Let them know, that if they do not follow through on the contract it will effect you too. Make sure they understand everything that you need a good credit history for, (from cell phones, to renting an apartment).
Next you will need to work with them to start a savings account and payment plan based on how much they make and how much is due each month. Do not be afraid to encourage your student to pay it off before they are required to. In fact, it would be a wise idea to pay off as much as possible before it starts gaining interest. Pick a realistic amount he/she can pay off each month.
Next you will need to make an agreement that your student will contact you if he/she ever needs help paying the loans. Also, you will need to agree that you will have access to the loan account. You should be able to check on the account and set it up so that warnings are sent to you if a payment is late.
Make your student sign a contract regarding the terms you discussed. You will each keep a copy of the terms. If they do not want to agree to reasonable terms they can get their own loans.
Make sure to create a hardship plan, in case your student loses his/her job or falls on to hard times. You will want to decide now whether you will pay or what will happen.
