Who is on the hook for student loans?

Parents often ask what options their student has for loans that don’t require a co-signer. The answer: very few other than federal direct student loans.

A quick review: undergraduate education loans come in three broad types:

• Direct student loans: These are federal loans for undergraduate students, with an annual borrowing limit ranging from $5,500 for first-year students to $7,500 for the last years. Students whose parents cannot borrow under the federal Parent PLUS loan program can borrow somewhat more.

• Parent PLUS loans: These are federal loans for parents. Because parents have to qualify for these loans based on credit history, they are able to borrow more: up to the full cost of attendance.

• Private loans: These are offered from a variety of sources, primarily banks and other financial institutions but might also in some cases be offered by schools.

Federal direct student loans are a unique type of loan: the federal government is lending to an individual with (typically) no credit history. Unlike a private lender who qualifies the borrower through a risk-assessment process, the federal government is assuming the risk of non-payment.

One of the unique benefits of federal education loans is they are non-recourse loans, meaning that no one other than the named borrower is responsible for the loan. If the borrower dies, for example, the estate is not liable for the loan balance. This is quite different from, for example, your mortgage, where your estate is required to settle that debt.

Once you leave the federal loan market, things are quite different. Private lenders assess the borrower’s risk of nonpayment and decide whether or not to lend on that basis. The assessment of a teenager with no credit history is likely to be “too risky” and thus there are few circumstances in which the parents would not be required to co-sign. And co-signers are equally liable for the debt. Depending on the lender, it may be easy or difficult– usually difficult– post-college for the co-signer to be released from the loan once the student has established credit. And again, each lender has its own criteria and processes for this.

There may be limited circumstances where schools lend directly to students without parent co-signers. However, this would be a school policy, not an overarching education program, and the school would determine whether, to whom, how much and under what terms. You can always ask your school if they have such an option but don’t expect the answer to be “yes.”

Once the student graduates and becomes established in their career and builds more credit history, there may be opportunities to “refinance” a parent PLUS loan into a loan in the student’s name, through a private lender. But again, the federal loan programs do not offer this so the borrower would be giving up federal loan protections to go that route. Of course, many young adults have simply assumed responsibility for parent PLUS loans that were taken out to pay for their education. However, the parent remains the named borrower and if the former student ever stopped paying, the parent is liable for the loan.

So to answer the original question: there’s a very small pool of loans available to undergraduate students without a cosigner, and any cosigner is responsible for the loan if the named borrower defaults.

See Student Loans Overview for more insights.