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Should I cosign a student loan?
5 risks to consider before putting your name on the application.
Why cosign a student loan?
You might want to cosign a student loan when your child — or another student who is close to you — really has no other option to pay for school. Private loans are designed to be a last resort after exhausting all federal aid, scholarship and grant opportunities.
If the student still has school expenses left, a private loan might be the only way they can afford to attend. Cosigning the loan can help them meet income and credit requirements — and maybe even get a better rate if you have good credit. Since many students can’t meet the credit and income requirements on their own, bringing on a cosigner may be their only choice.
What are the risks of cosigning a student loan?
Cosigning generally comes with more risks than rewards for the cosigner. While it might seem like a no-brainer to help your child succeed in college, consider what you have at stake before you fill out the cosigner application.
You’re fully responsible for repayments
Cosigning a loan isn’t like giving a reference. You’re just as responsible for the repayments as the student. If the lender requires full repayments right away, you’ll likely have to step in to make them unless the student has a job. You also might find yourself pitching in for more than you intended if the student has never handled money before or has trouble finding a job after graduation.
It could make it hard to qualify for other types of credit
Having a student loan on your credit report can increase your debt-to-income ratio (DTI), which is one of the factors that creditors consider when you apply for a loan or credit card. Even if you can qualify, having too much debt can make it difficult to get a competitive deal. If you cosign a student loan, you might have to put off that mortgage or car loan you were eyeing.
Bankruptcy and death could trigger auto-default
While increasingly rare, some private student loan contracts come with a clause that says the loan will go into default if the cosigner dies or declares bankruptcy. This might be more of a risk to the borrower than to you. But it counters the main reason to cosign a student loan in the first place.
It’s hard to get out of
There’s little you can do to remove yourself from a loan once you’ve cosigned it. You’ll have to convince the borrower to apply for cosigner release or to refinance in their own name to release you from the obligation. But ultimately that’s not your decision.
You could hurt your relationship
Sharing the risk can complicate your relationship if something goes wrong. It’s one thing to learn that your child is bad with money, and another to bear responsibility for their mistakes. Even if you go in with good intentions, you might not be pleased if you have to deal with the consequences of a borrower at the bottom of their financial learning curve.
How does cosigning a student loan affect my credit?
Cosigning a student loan can have both a negative and positive impact on your credit. It’ll initially lower your credit score by increasing your credit utilization ratio, which is the second most important factor in your credit score. And it can also lower your credit score if the student is late on a repayment and you didn’t catch it.
But it can increase your credit by contributing to your history of on-time repayments. And, if you’ve never taken out an installment loan, it can also improve your credit score by diversifying the types of credit on your report. But the negatives typically are more impactful than the positives.
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Am I eligible to be a student loan cosigner?
You likely won’t be able to cosign a student loan unless you meet these general criteria:
- Good credit. Many lenders require a credit score of 680 or higher for the cosigner.
- Steady income. You generally need to be employed and bring in at least $25,000 a year — or enough to support repayments.
- Low DTI. Generally, your DTI needs to be below 43% to qualify for any type of credit.
- US citizen or permanent resident. Almost all student loans that accept cosigners require the cosigner to at least have a green card to qualify.
- Live in eligible state. Not all student loan providers are able to lend to residents of every state. Make sure where you live doesn’t disqualify you from cosigning a loan.
4 steps to take before cosigning a student loan
Cosigning a private student loan isn’t ideal, so follow these steps to make sure it’s the only choice for you and your child:
- Make sure the student has applied for all other aid. Make sure they’ve completed the FAFSA, filled out the CSS profile and considered all other types of aid before agreeing to cosign a loan.
- Compare lenders together. Don’t let the student go it alone or make the decision themselves. Work together to weigh the pros and cons of student loan providers so they have a better understanding of their responsibility.
- Consider lenders that offer cosigner release. Lenders that have cosigner release allow the student to take on the full responsibility of the loan without refinancing, as long as they can meet the requirements on their own.
- Set some ground rules. Draw up a plan that states who’s responsible for what types of repayments and what to do if something goes wrong. For example, you might want to agree to cover repayments while the student is still in school or set a date for when they should notify you if they’re short for that month.
How else can I support my child’s education?
Aside from cosigning a student loan, you have a few other ways to help your child pay for college:
- Open a 529 account. This state-sponsored savings account allows you to set part of your income toward your child’s college expenses before taxes. You might even be able to earn tax credits for your contributions, depending on where you live.
- Take out a parent loan. Rather than running the risk of ruined credit and relationships, take out a federal loan in your name or borrow from a private lender yourself.
- Help them through the financial aid application process. Spend some time researching college grants and scholarships, and look into lesser-known options like income-share agreements and student loans that don’t come with interest to make sure they’ve explored all available avenues.
Cosigning a student loan comes with several risks and almost no financial benefit for you. But it could be worth it if it’s the only way someone you care about can succeed in their college career.
You can learn more about how borrowing for school works by checking out our guide to student loans.
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