Should I Cosign? The Pros and Cons of Cosigning a Student Loan
If you’re reading this, it’s probably because someone you care about has asked you to cosign a student loan. They’ve come to you because you’ve always been there for them, and they hope you’ll support them as they enter the next phase in their life – going away to college.
They might be your child or your grandchild.
If you’re a teacher, they might be a former student you have a lot of faith in.
Your first instinct may be to say “yes” immediately. But, like many financial commitments, there are risks and benefits to cosigning a student loan that you should consider before signing on the dotted line.
Here, we’ll explore the pros and cons of cosigning a student loan, including what cosigning a loan involves, and common reasons a student might need a cosigner. We will also discuss how cosigning a student loan may impact your financial future.
What does it mean to cosign a student loan?
Broadly speaking, a student loan cosigner is someone with an established credit history who agrees to share equal financial responsibility for a student loan. Cosigners are often family members or relatives, but they don’t have to be.
When you cosign a student loan, your credit and financial history can be used to help a student qualify for a loan, provided you have met the necessary credit and income requirements. Cosigning a student loan can also help secure a better interest rate for your student than if they were to apply on their own.
It’s important to keep in mind that the total amount of the loan will show up on your credit history as if you took out the loan yourself—which means you accept equal responsibility of the loan, including any missed payments. The full loan amount will also show up on the student’s credit history.
So, while cosigning a loan means that your loved one can focus more time on achieving their goals rather than worrying about finances, remember your credit could be impacted by how the student handles their student loan payments. It is important to ensure that you understand the potential financial impact before making the decision to cosign a student loan.
When might a student need a cosigner for a student loan?
Many students and their families may turn to private student loans to pay for college if grants, scholarships, and federal aid won’t cover the full amount they need. Private student loans for college are available to undergraduate and graduate students, as well as international students and DACA recipients.
- Age: People under the age of majority can’t generally enter a legal contract. The age of majority ranges from 18 to 21, depending on the state you live in.
- Credit: If your student has no credit history, a short credit history, or a poor credit score (usually 600 or below), they may not qualify for a loan without a cosigner. If they do qualify, their loan may have higher interest rates.
- Income: Lenders often look at a borrower’s income to help determine if they could repay the loan on their own. If your student plans to work part-time or full-time during school, this could further affect their loan terms.
- Debt: When borrowers have a lot of debt, even if their credit score is good, this can raise red flags for many lenders. Your debt-to-income ratio (DTI), or the amount of your monthly debt payments divided by your monthly income, can be a common factor in lending decisions.
- U.S. Citizenship or Residency: If your student is not a U.S. citizen or permanent legal resident, they may be unable to borrow money without a cosigner depending on the lender’s eligibility criteria.
If you’re considering cosigning a student loan for a loved one, it’s easy for emotions to take over. Chances are you want to help them achieve their educational and financial goals, and college (or a vocational program like a coding bootcamp) is an important step toward their future.
Try to put emotions aside when considering if the benefits of cosigning a loan outweigh the potential risks. No matter what you decide, the outcome of this conversation will be significant for both of you.
Are student loans available without a cosigner?
Student loans with no cosigner are available from some lenders, but not all provide this option and the requirements will typically be different with each. There are a number of different factors, such as age, income, and credit history, that may be used to determine if a student is eligible for a loan on their own.
Many students first turn to federal student loans, which can often be a better deal than private student loans, however federal loans don’t always cover the full cost of college and may not be available for all students or types of study. In these cases, private loans may be a good option for students and their families.
Ascent has two non-cosigned loan options for undergraduate students, including DACA recipients:
- Credit-Based Student Loan Without a Cosigner: If a student has more than two years of credit history and meets a minimum credit score and income requirements, they may be eligible for a loan without a cosigner.
- Outcomes-Based Student Loan Without a Cosigner: Full-time college juniors and seniors who meet specific requirements may be eligible for students with no credit or pass the minimum credit requirements but don’t meet the repayment or income requirement. Students can qualify on other factors including, school, program, graduation date, major, GPA, and cost of attendance.
What are the pros and cons of cosigning a student loan?
There are financial implications to cosigning a student loan. Though your head should ultimately guide your decision, it might also be helpful to consider how this might impact your relationship with your student.
Let’s review some of the pros and cons of cosigning a student loan.
Benefits of Cosigning a Student Loan
Cosigning a student loan has many positives—and not just for the student, who may benefit from lower interest rates and more agreeable terms, while building their own credit.
Some potential benefits for cosigning a student loan may include:
- Emotional Satisfaction: While emotions should be taken out of the equation as much as possible, helping a loved one achieve their educational goals is important as you support this huge milestone in their life.
- Avoiding Bumps Down the Road: If a person who asked you for help cosigning ends up being unable to afford their payments or make them on time, they may return to you to ask for help—this time in cash form—before they miss a payment and impact your credit score. With the lower interest rates and payment amounts that typically come with a cosigner, you may help set them up for repayment success.
- Cosigning a Loan Could Build Your Credit: Since a consigned loan will show up as a line of credit on your credit report, your credit can improve if your student continues to make payments on time. (More on this below.)
- It’s (Probably) Not Forever: Some lenders allow the cosigner to be removed from the loan after 24 consecutive payments.
Cons of Cosigning a Student Loan
As with anything finance-related, there are risks to cosigning a student loan.
Possible consequences to cosigning a student loan include:
- Strained Relationships: If the student borrower does not make payments on time, this can cause tension in your relationship. Also, if you’ve already cosigned for student loans for other students, the debt may limit you from cosigning even more loans. This could limit financial opportunities for your current student or seed feelings of resentment.
- You May Have to Pay: If the student doesn’t make a payment for any reason, as a cosigner you are legally obligated to make payments on their behalf. You are also responsible for the total amount if they stop paying completely.
- Cosigning a Loan Could Hurt Your Credit: Missed or late payments will show up in your credit history and may have a negative impact on your credit score.
- You Might Have to Put Off Your Needs: Cosigning a student loan impacts how other lenders see your credit since it is essentially debt on your credit history. This could impact your eligibility or terms when applying for new lines of credit, including auto loans or home loans.
This may come as a surprise, but there are also financial risks to cosigned student loans for the students themselves.
If the cosigner on the student loan files for bankruptcy or passes away, in some cases, the student loan may immediately become due in full. In the case of bankruptcy, if payments are still made regularly the student’s credit score probably won’t be impacted—but the loan may show up as being involved in a bankruptcy. This varies by lender and state, so be sure to read the fine print and ask questions before signing anything.
If you become gravely ill or plan to file for bankruptcy, it is important to remember to tell the student you cosigned with as soon as possible. This will give them a chance to try and work out an alternative plan with their loan servicer.
Will cosigning a student loan affect my credit?
You don’t have to have perfect credit to be a cosigner; you typically just need to meet minimum credit and other requirements. If things go well, your credit may improve alongside the student’s. Two primary reasons that cosigning a student loan can help your credit score are:
- On-Time Payments: First and foremost, payments made regularly are always good for credit scores. The lender won’t differentiate between who makes the payments, so if the student borrower makes most or all of them on-time, your score can go up without you ever spending a dime.
- Credit Mix: While this doesn’t usually make as big of an impact as on-time payments, having a mix of different types of accounts (as in installment loans like student loans and revolving accounts like credit cards) on your credit history can make you look like a trustworthy borrower.
Of course, the credit score benefits of cosigning student loans only work if the payments happen on time and in full. So, what do you do if this doesn’t occur?
How can I protect myself if a student doesn’t pay on a cosigned loan?
Unfortunately, there are situations that can interfere with the timely repayment of a student loan.
Some students may not find a job (or perhaps not their dream job ) immediately after graduation, preventing them from making payments on time or in full. Other times, unexpected expenses such as illness or injury may interrupt their regularly scheduled payments. Ascent college loans will be forgiven if the borrower dies or becomes totally and permanently disabled
And then there are times when a borrower simply chooses not to pay.
If the student borrower hasn’t proactively communicated with you, you may not realize the student has defaulted on the loan until it’s too late. Even though you’re equally responsible for the loan, lenders often send information to the student borrower first, and reach out to the cosigner if there’s a problem.
When payments stop happening altogether, the lender will likely expect the cosigner to make any back payments and take over repayment moving forward.
However, there are a few things you can do to protect yourself before and after an issue arises.
If the Worst Happens
If you cosigned the loan without a legally binding agreement in place, and the student can’t or won’t pay, your options are limited—but you do have some.
- Talk to the Lender or Servicer: Once you find out there’s a problem, immediately contact your loan servicer to discuss your options. Some may be willing to work with you on a new repayment schedule or temporarily pause payments while you get things figured out.
- Keep Paying: If the loan servicer tells you to keep making payments, do so. You’re only hurting yourself further if you don’t.
- Split the Bill: If you can get a hold of the student, talk to them about the issue, why it’s hurting you, and figure out a plan. You could consider splitting payments or work out a payment plan where they pay you their portion directly, then you pay the lender.
- Try to Get Released from the Loan: Requirements for a cosigner release vary by lender, but under certain circumstances some lenders may be willing to remove you from the loan altogether.
- Lawyer Up: This one probably stings, but you may want to get a lawyer involved to help you navigate this situation. A lawyer who specializes in student loans may help you understand your options if you are facing legal repercussions due to a student loan default.
So, while you do have rights and several options, know that in most cases the loan will need to be repaid.
How can Ascent help cosigners and borrowers?
Ascent is honored to be recognized as the best private student loan for 2021 by Forbes Advisor and NerdWallet (to name a few), and is committed to providing students with more opportunities to finance their education. In addition to our student loans and scholarship opportunities, we offer free financial wellness resources to set students and their families up for financial success during college and beyond.
Visit our Bright Futures™ Engine to learn more about the potential return of your college investment across different schools and majors.