Cosigning a Student Loan: Pros and Cons
The biggest pro of cosigning a student loan is obvious: You'll help someoen you care about attain the education they need to secure their financial future. Plus, cosigning a private student loan is often the best way to fill tuition gaps at the lowest interest rate possible.
The biggest con is obvious, too: If the student doesn't pay back the loan for some reason, you'll be on the hook. However, there's more to cosigning than meets the eye. Let's take a closer look at some things you should think about before you cosign a student loan.
What does it mean to cosign a loan?
When you offer to cosign a loan, you agree to share the responsibility of paying off the debt associated with that student loan.
Your student is the primary borrower on the loan, but you agree to take on all payment obligations associated with the student loan if the student is unable to fulfill their commitment.
In other words, if your student defaults or cannot pay for any reason, you're legally obligated to pay the loan. Use our NitroScore tool to forecast potential loan payments after graduation.
Does your child need a cosigner for student loans?
Cosigners aren't required for federal student loans. However, many students find that federal loans aren't enough to cover their entire college cost so they supplement their financial aid with private student loans.
If your child is applying for a private student loan, you'll probably need to cosign. Unless your teen has an established credit history of their own (most kids don't), they'll need a cosigner with a solid credit history to get a private student loan.
There is one innovative lender, Ascent, that offers private student loans to college juniors and seniors based on their future income potential, rather than their credit histories. Ascent's CEO gave us an in-depth interview about how this unique loan product works. You can read more about it here.
Which student loans are available without a cosigner?
Most federal loans don't require a cosigner. For example, the Perkins loans and Direct Subsidized and Unsubsidized loans (Stafford Loans), don't require a credit check or a cosigner.
If your child qualifies for federal financial aid, federal loans should be your first choice before looking at private student loans. Federal loans often have lower interest rates than private loans, as well as more generous repayment terms if the borrower can't pay for some reason.
So your best strategy is to max out "free money" from grants and scholarships, then turn to federal student loans, and only then use private loans to fill in tuition gaps.
If your child is a junior or senior, they may be eligible for non-cosigned private student loan from Ascent.
Pros of cosigning a student loan
There are some significant pros to cosigning a private student loan.
1. You can fill in funding gaps
The obvious pro of cosigning a loan is being able to help your teen with this next phase of their life. Private loans allow you (and your child) to fill the financial gap that federal financial aid, grants, or scholarships did not meet.
2. You can get a lower interest rate than you would on a parent loan
If you're weighing whether you should cosign a student loan for your child or take out a parent loan, you're likely to find that cosigning offers a lower interest rate. The reason is simple: Lenders assume less risk when there are two names assigned to a loan.
3. It's doesn't have to be long-term
If you’re concerned about being attached to this debt for the next 10 to 20 years, take some time to research different lenders. Some are willing to release you as the cosigner if your child demonstrates responsible repayment. There are also ways your student can remove you from the loan once they're more established financially.
Cons of cosigning a student loan
1. Your credit score could be affected
The most obvious con of cosigning a student loan is the potential aftermath if your child misses a payment or stops paying off their student loan. If your child is late on payments — or worse, starts missing them altogether — this can have an impact on your credit score, as well as your wallet, since you'll be on the hook for payment.
One other factor to consider is how cosigning could impact your ability to apply for other types of loans or credit. If you're likely to need to take out any loans in the future (for a new car, home renovations, or even to help another child go to college, etc.) you may want to talk with a financial adviser about how it's likely to impact your credit and ability to borrow.
2. You could end up paying the loan
Finally, you need to consider your relationship with your child. While you can’t predict the future, it’s worth thinking through your response if they default on the loan. This way, at least you go into the process with your eyes wide open to all possible outcomes.
Need more info?
To take a closer look at your college funding options, we suggest checking out We Rank Your Best Parent Loan Options: Are Parent PLUS Loans a Good Deal?