Should You Co-Sign a Student Loan?
If you’re asking yourself, “Should I co-sign a student loan?” it’s important to understand the risks. Read on to learn more.
Many college students interested in borrowing for school can't qualify for private loans on their own. As a result, they may ask parents or other loved ones to co-sign student loans for them.
If you're asked about co-signing for student loans, it's important that you don't rush into saying yes — even if you want to help out your child or other family member or friend who has made the request. Before you decide, consider the risks of co-signing student loans so you can make a fully informed choice.
What does it mean to co-sign student loans?
Before you answer the question “Should I co-sign a student loan?” you need to know what co-signing for student loans means.
Co-signing means lenders consider your financial credentials along with those of the primary borrower. This is usually necessary only for private student loans, as private lenders have income and credit score minimums for approval, while most federal Direct Loans don't.
Lenders evaluate your finances along with the primary borrower's finances because you agree to share legal responsibility for paying back the loan. Since lenders can try to collect from you, this reduces their risk, and they're more willing to give a loan to an unqualified primary borrower.
Should I co-sign a student loan?
Making the right choice on whether to co-sign student loans is more difficult than it seems.
That's because agreeing to co-sign can help the primary borrower tremendously by enabling them to qualify for a loan at an affordable rate. Without your assistance, they may not be able to get the funds they need for school. But the risk you are taking on is considerable, and there are serious financial downsides for you.
There are a few big questions to consider when asking yourself, “Should I co-sign a student loan?” to make sure you don't regret your decision.
Are you eligible to co-sign student loans?
Private lenders consider a borrower's credit and income when deciding whether to provide a student loan. While virtually anyone is allowed to co-sign a student loan for any other person, you're helpful as a co-signer only if you have good credit and solid proof of income.
If your credit score isn't very high or you don't make enough money to pay back the loan, then unfortunately you won't be very helpful as a co-signer. You won't reduce the lender's risk because you aren't actually better qualified than the student who is trying to borrow.
Has the primary borrower explored other options?
There are many different sources of financial aid for college. If the primary borrower can get scholarships, grants or federal student loans that don't require a co-signer, it's best if they do so first. That way, you won't have to put your credit on the line to help them go to school.
Do you know the risks of co-signing student loans?
Co-signing for student loans means you agree to accept legal responsibility for paying back someone else's debt if they can't. This decision could affect you financially in a number of ways:
- You could end up with your credit score damaged if the primary borrower doesn't make payments on time.
- Lenders could try to collect from you if the primary borrower doesn't make payments on time or defaults on the loan.
- In some cases, you could be responsible for repayment if the primary borrower becomes disabled or dies (some lenders forgive the debt in these situations, but not all)
- Your own ability to borrow could be affected because of the co-signed loans on your credit record
Unless you are willing to take on all of these risks, you may want to say no if you are asked to co-sign student loans.
How to reduce the risks of co-signing for student loans
If co-signing for student loans is something you want to do despite the downsides, there are things you can do to try to reduce the risks:
- Make sure the primary borrower takes out the minimum possible amount of loans: The lower the loan balance, the less the risk to you since you won't have to pay back as much money if they default.
- Discuss the consequences of co-signing with the primary borrower: Make sure they understand the risk you are taking and have a clear plan for repayment.
- Keep on top of the co-signed loan: You may want to ask the primary borrower for a copy of the monthly statements or for them to provide proof of payment to show they are on top of the loan and not putting your credit at risk.
- Consider a life insurance policy on the primary borrower: If there is no forgiveness upon death, consider a life insurance policy on the life of the primary borrower that would allow you to repay the loan balance if the worst happened.
- Choose a loan that provides co-signer release: This allows the co-signer to be removed from the loan after a certain number of on-time payments (such as 24 or 36) rather than remaining legally responsible for repayment for the life of the loan.
It's also important for the primary borrower to shop around carefully for an affordable loan. The lower the interest rate, the less expensive repayment will be and the easier it should be for the borrower to pay off the loan on schedule without affecting the co-signer.
Juno can help borrowers get the most affordable rates possible on their student debt. We partner with lenders offering both private loans for undergraduate students and private loans for graduate students. While some loans require co-signers, the rates are competitive because we get groups of borrowers together and make lenders compete for their business.
Christy Rakoczy Bieber
Christy Rakoczy Bieber is a full-time personal finance and legal writer. She is a graduate of UCLA School of Law and the University of Rochester. Christy was previously a college teacher with experience writing textbooks and serving as a subject matter expert.
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