In this article:
As a parent, it's natural to want to help your child succeed. And when it comes to college, that may involve helping them secure a student loan by cosigning the application.
Whether or not you should be a student loan cosigner for your child depends on several factors, and it's important to consider all of them before you proceed.
Do Student Loans Need a Cosigner?
Most federal student loans are available to college students without a credit check. So, if your child can cover all of their educational expenses with federal loans, scholarships, grants and other funding sources, they won't need you to cosign anything.
But if your child has maxed out their federal loan allotment and can't come up with enough money to pay for their remaining expenses, they may need to turn to private student loans.
Unlike federal loans, private loans require a credit check, which can be a major obstacle to college students who may not have had the chance to build a credit history. In this instance, they may need a parent to cosign their application to help them get approved.
How Does Cosigning a Student Loan Work?
Cosigning a student loan is a significant financial commitment. That's because when you cosign a loan, you agree to repay the debt if the primary borrower fails to.
In exchange, the lender will also consider your credit history, income and other factors to make its decision. In addition to increasing approval odds, cosigning can also help your child secure a lower interest rate on the debt.
Because you're obligated to repay the loan if your child doesn't, however, the loan will show up on your credit reports, even if you never actually make a payment.
In some cases, private lenders will offer cosigner release programs, where the primary borrower can have the cosigner removed after they make a minimum number of consecutive payments and meet the lender's creditworthiness requirements on their own.
Pros and Cons of Cosigning a Student Loan
Cosigning a student loan can be advantageous for your child, but it can also be risky for you. As such, it's crucial that you consider both the benefits and drawbacks before you proceed.
- Helps your child get funding: If your child doesn't have any other options, cosigning their student loan application can help keep them in school.
- Can save your child money: If you have great credit and a relatively low debt-to-income ratio (DTI), you could help your child qualify for a low interest rate, which can result in a lower monthly payment.
- You won't have to borrow: Another option could be to take out parent PLUS loans or private parent loans to help your child, but that would make you the primary borrower and could impact your financial well-being and goals even more.
- Possible damage to your credit: As previously mentioned, the loan, including your child's monthly payments, will show up on both your and your child's credit reports. As a result, if your child misses a payment by 30 days or more, it could damage your credit score significantly.
- Could hurt your chances of getting credit: Even if your child makes all of their payments on time, the loan can still impact your ability to obtain credit. Not only will the loan amount be included in your amounts owed, but the monthly payment will be included in your DTI calculation. Depending on your overall credit and financial situation, the loan could impact your ability to get approved for credit when you need it.
- Monthly payments could affect your financial goals: In a worst-case scenario, your child may graduate from college and have difficulty paying their student loans. If you need to step in, those monthly payments could impact your ability to save for retirement, work toward other financial goals or even keep up with your basic financial obligations.
When to Cosign a Student Loan
It's critical that you take the time to carefully consider how cosigning your child's student loan can impact you. Here are some situations where it might make sense to proceed:
- Your child has exhausted scholarships, grants and federal student loans.
- Your child can't work to earn money for school.
- Your child can't qualify on their own because they have no credit history, or their credit history is limited or even poor.
- You don't want to take out parent loans, which would be solely your responsibility.
- You have great credit and a low DTI.
Other Options to Consider
Even if any of the above is true, there are still some alternatives that can help you avoid the potential negative consequences of cosigning your child's student loan without forcing your child to drop out:
- Take out parent PLUS loans or private parent loans.
- Offer to pay some of their expenses out of your income or savings.
- Encourage your child to find a job, if possible.
- Help your child research private student lenders, such as Ascent, that offer outcomes-based loans with no credit requirements.
- Look into income-share agreements, which work like student loans but don't require a credit check.
- Encourage your child to transfer to a less expensive school.
Steps to Take if You Cosign a Private Student Loan
If you decide to cosign your child's student loan application, have a conversation with your child about how it'll work. Some details you'll want to work out include:
- When the repayment process begins.
- Who will be making monthly payments.
- What will happen if your child can't afford their monthly payments.
- Whether the lender has a cosigner release program and how long that will take.
You may also want to have your child share their login credentials with you so you can monitor the repayment process. You may even consider setting up alerts so you'll find out if your child has missed a payment. That way, you'll be able to step in and help avoid damage to your credit.
Maintain Good Credit to Avoid Some of the Drawbacks of Cosigning
While cosigning your child's student loan can negatively affect your credit score, you can limit that potential impact by being vigilant about maintaining good credit. With Experian's free credit monitoring service, you can keep track of your FICO® Score☉ and Experian credit report.
Having this information at your fingertips can help you spot potential weaknesses in your credit file and address them. It can also help you stay on top of problems as they arise, so you can take swift action to avoid further damage.
By maintaining a credit history that's strong overall, you'll have an easier time obtaining credit when you need it, even with the extra loan on your file.