Nov 22, 2024
Going back to school isn't easy, but it can sometimes be a necessary stepping stone to launching yourself into a new career. And when it’s your grown child looking for help to afford this new start, you may be eager to support them however you can.
But what if that means co-signing a private student loan? If you have a child who wants to pursue a new degree but can't qualify for a loan on their own due to a lack of income or poor credit, then their only path to borrowing may be to get a cosigner. And if you're in a comfortable place financially, you may be inclined to help out by putting your name on that loan.
Advertisement
But before you sign on the dotted line, you should know that cosigning a student loan carries risk. Here’s what you need to know before taking on this financial commitment.
What happens when you cosign a student loan?
There are a few risks of cosigning a student loan that could hurt you financially. When you cosign a student loan, you effectively agree to repay that loan if the original borrower is unable to make payments. That means if the original borrower — in this case, your child — doesn't pay, the lender can go after you.
It also means if your kid falls behind on their payments, they won't just damage their own credit score — they could take yours down in the process too. And if that happens, any loan you take out for the next seven years (how long late payments can stay on your credit report) could be harder to qualify for and more expensive.
The amount of the loan will also be added to your existing debt when it comes to calculating your debt-to-income ratio. If that pushes your DTI beyond 35%, that can also make it harder to qualify for loans of your own, such as a mortgage refinance.
Essentially, as a cosigner, you need to be prepared to shoulder your adult student’s monthly payments or face some serious financial consequences. And that may mean having to put your own financial plans or goals on hold.
Not all parents are prepared for these possibilities. A 2017 survey from LendEDU found that about 33% of private student loan cosigners did not fully understand the risks involved.
Must Read
- Dave Ramsey warns nearly 50% of Americans are making 1 big Social Security mistake — here’s what it is and the simple steps to fix it ASAP
- Robert Kiyosaki begs investors not to miss this ‘explosion’ — says this 1 asset will surge 400% in a year
- Vanguard reveals what could be coming for U.S. stocks, and it’s raising alarm bells for retirees. Here’s why and how to protect yourself
Join 250,000+ readers and get Moneywise’s best stories and exclusive interviews first — clear insights curated and delivered weekly. Subscribe now.
How to protect yourself if you’re being asked to cosign a student loan
Since co-signing a student loan carries risk, you may want to see if it's possible for your child to borrow money without your help. The problem with private loans is that lenders require a certain credit score to qualify. If your child is short on funds with poor credit, they may not be able to get a private loan on their own.
Advertisement
Most federal student loans, however, do not require a credit check. And for this reason, they don't require a co-signer. So have your child see if that's an option before agreeing to cosign. Federal student loans also offer a number of protections that private student loans don't, like income-based repayment plans and forbearance or deferment when financial circumstances warrant it.
Assuming that's not an option, set clear expectations with your child before cosigning their private loan. Write out an agreement between the two of you that documents who's going to be making payments and when.
Additionally, before you put your name on your child’s student loan, make sure your finances are as in good shape as you think they are. If you end up having to make payments on that loan, it could, for example, limit your ability to save for retirement for a period of time. So make sure you’ve got a decent-sized nest egg already. LendEDU's survey found that about 51% of cosigners felt that their child's debt was putting their retirement in jeopardy.
Finally, do an honest assessment of your child as a borrower. If they’re notoriously bad with money, you’re taking an even bigger risk. And you don’t want your cosigner role to impact your relationship. So if you feel you need to say no, do it.
Your child could always work a few more years and take steps to boost their credit to qualify for a loan on their own. And in that situation, if they start struggling to repay it, you’ll be able to choose to help them out, as opposed to being legally obligated to do so.
You May Also Like
- Turning 50 with $0 saved for retirement? Most people don’t realize they’re actually just entering their prime earning decade. Here are 6 ways to catch up fast
- This 20-year-old lotto winner refused $1M in cash and chose $1,000/week for life. Now she’s getting slammed for it. Which option would you pick?
- Warren Buffett used these 8 repeatable money rules to turn $9,800 into a $150B fortune. Start using them today to get rich (and stay rich)
- Here are 5 easy ways to own multiple properties like Bezos and Beyoncé. You can start with $10 (and no, you don’t have to manage a single thing)
Maurie Backman has been writing professionally for well over a decade. Since becoming a full-time writer, she's produced thousands of articles on topics ranging from Social Security to investing to real estate.
