Cosigning a Student Loan: Pros and Cons
A college degree can be a huge investment, with the average student graduating with almost $30,000 in debt. If you can’t afford to pay it all off yourself, you may need to borrow money, but many students have trouble qualifying for loans. Cosigning a student loan can help you get the financing you need to attend college by expanding your options. However, this arrangement is not without risks. Read on to learn more about cosigning a student loan and whether it’s right for you and your family.
What it means to cosign a student loan
It’s important to know that cosigning a student loan means you are responsible for the debt. You will not be the primary borrower, guarantor, or co-borrower, but rather just a cosigner. To compare:
- A cosigner is a person who signs on to another person’s loan agreement in order to help them qualify for better rates and terms by assuming some of the risks if the borrower does not pay back their debt on time.
- A guarantor signs on to another person’s loan agreement and promises that they will repay any amount owed by either of them should they fail to pay off their own loans according to schedule.
- A co-borrower goes into an agreement with another individual whose financial status is already established (and has been approved) through their credit history and income verification; they then both receive benefits from being able and willing each other to succeed financially in spite of any potential shortfalls between what one may earn versus what another brings home monthly or annually based upon factors such as employment status type (freelancer vs employee), geographic location where work takes place daily etcetera.”
Pros of cosigning a student loan
- You can help your student get approved for a loan. When you cosign a student loan, you are helping your child or family member build their credit history and show lenders that they are responsible borrowers. This can be especially helpful if they have not worked full-time in several years or if they have limited or no income.
- A lower interest rate. If the borrower pays back their loans on time and stays current with payments, the lender will reward them by lowering their interest rate over time (this is called the “prepayment penalty”). When this happens, it’s good news if you were a cosigner because it will reduce what your child owes to pay back!
Cons of cosigning a student loan
As you can see, cosigning a student loan can be a risky decision for both parties. However, there are also several benefits to being a cosigner. These include:
- The student is guaranteed to have access to funds to pay for college
- The student will likely get approved by lenders and institutions more easily
- The cosigner may feel some relief knowing that the debt was taken on by their child (and not their own)
A credit check may get a student accepted for a loan.
If you’re a student applying for a loan, it’s possible that your credit score will be checked. This may happen if:
- Your cosigner has a poor credit score. If this is the case, it may hurt your chances of getting the loan you need.
- You have no assets or income to use as collateral. A cosigner can help reassure lenders that they’ll be paid back if you default on your payments (which means not paying what was agreed upon).
The cosigner needs to be in good financial shape to avoid problems.
- The cosigner needs to be in good financial shape to avoid problems.
- The student’s credit may not be good enough for the lender, so the cosigner will need to help.
- Lenders check the cosigner’s income and assets, as well as their credit history and current debt payments.
- The cosigner should have a long-term relationship with both the student and lender because it’s hard for lenders to track down people who move frequently or go by different names on different documents.
Cosigning could be a permanent arrangement depending on the lender.
In some cases, cosigning a student loan can be a permanent arrangement. This is especially true if the lender is not willing to release your child as a co-signer once their graduation or repayment status has been confirmed. In these cases, you will have signed away your right to cosign as soon as they graduate or default on their loan.
In other cases (such as with Sallie Mae), you may be able to be released from your obligations after a certain period of time has passed and unpaid amounts are paid in full. However, this varies from lender to lender and should always be considered when reviewing any agreement you sign on behalf of yourself or another party.
What you need to know about cosigner release
If you are a cosigner on a student loan, you may be able to request that your name be removed from the loan. This is called cosigner release.
You can apply for it if:
- You have made all of the required payments on time for at least three consecutive years and you have had good credit during this time period
- You no longer want to be responsible for paying back the loan
If your application is approved, then your name will be removed from the loan and replaced with your student’s name—and he or she will become responsible for making all future payments on time. If your application is denied, then there’s nothing else you can do unless something changes (e.g., if something happens to make it more likely that they can afford their payments). After they graduate and get a job, they should ask about refinancing their loans so they can pay them off faster than originally planned.
Cosigners pledge assets as collateral.
It’s important to know that cosigners can get stuck with the debt if you can’t pay it back.
Cosigners who choose to participate in this type of loan agreement are required by law to pledge assets as collateral for their student loan obligations. If the borrower does not make timely payments, then a debt collector can come after your cosigner for payment.
This means that cosigners need to be in good financial shape themselves and have enough income and assets to withstand any potential losses from co-signing a student loan.
Cosigners could get stuck with the debt if you can’t pay it back.
- The co-signer could be held responsible for the loan.
If you default on a student loan, the lender may sue your cosigner for repayment of the debt. This can happen regardless of whether you were living with them at the time of default, or if they had no knowledge at all that you were in default on your loans. If they are sued and lose, they may have to pay off the entire balance themselves (it would not be discharged through bankruptcy). They could also be reported to credit bureaus as being in default on this debt and have their credit score affected as a result.
- Your cosigners can be sued for repayment even if they didn’t know about it beforehand.
The Consumer Financial Protection Bureau warns that many borrowers don’t realize that when someone else signs onto their student loan as a co-signer (or guarantor), it increases their own risk of liability when things go wrong down the road: “If your friend or relative signs their name to help with paying back money owed from school loans without understanding what this means,” CFPB writes in its guide for students looking for help getting started with repaying their loans.” The agency continues: “What happens if you stop making payments? Or what happens if an accident makes one or both spouses unable or unwilling to work?”
It may be easier for the student to get a job after graduation with no student debt.
If you cosign a student loan for your child, they can use the money to pay tuition and other expenses while they are in school.
Cosigning a student loan allows the borrower to get more favorable interest rates than they might be able to get on their own.
Some lenders do not require a cosigner if you have good credit. However, many lenders will require a parent or other adult family member as a co-signer if you do not have good credit or if this is your first time applying for financial aid. The co-signer is responsible for repaying the debt if the borrower does not pay it back on time or at all.
Decide whether cosigning student loans is worth the risk
- Consider the student’s ability to repay the loan
- Consider the student’s credit history
- Consider the student’s credit score
- Consider the student’s income
- Consider how much money you earn each month and how much debt you already have on your own credit card(s)
- Review your monthly expenses and make sure that cosigning a student loan won’t put you at risk of defaulting on other loans, like your mortgage or car payment
Weigh these pros and cons carefully, along with your other options. The earlier you can start saving for college, the better off you’ll be financially—and that goes for both students and their parents, who are also likely to feel the effects of increased college expenses. If a parent cosigns a student loan without considering this option, they could be putting their financial future at risk. By planning and preparing ahead of time, though, parents can make the right decision for themselves and their child without jeopardizing either person’s finances in the long term.