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Should you co-sign a student loan?

Teen talking to this mother
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Students who don’t receive enough financial aid to fund their education often turn to private loans to help cover the remaining costs. However, in order to qualify for a loan, many need to add a parent as a co-signer. There are several benefits to adding a co-signer, but it’s a responsibility that the parent should accept with caution.

If you’re thinking about helping your college student cover their outstanding school costs, make sure that you know the risks first.

When should you co-sign a student loan?

Private student loans use the borrower’s credit score, financial history and more to determine whether the borrower is eligible and what rates to offer. In many cases, lenders require credit scores of at least 600.

Because many students seeking private loans do not have much credit history to their name, they may not be able to get a loan without adding a co-signer. They may also choose to add a co-signer if they do qualify but their credit score has resulted in high rates.

If your child has used up all of their options for scholarships, grants and federal student loans, co-signing a loan for them may be your best option. You can take out a student loan yourself, but co-signing could be a better choice. Here are some of the benefits of co-signing a student loan:

  • The student loan will be in your child’s name, so they can start building credit history.
  • Both you and your child could see improved credit scores with a positive payment history.
  • A co-signed undergraduate loan may be cheaper than a parent loan.

Can students get a loan without a co-signer?

Federal student loans are an ideal first borrowing option for students, since there’s no credit check and everyone gets the same interest rate. Undergraduate and graduate students can get federal student loans without a co-signer, regardless of credit history.

With private loans, the situation is more complex. Anyone who has a decent credit score and history can borrow a loan, but the vast majority of students don’t yet have this financial history. However, there are some lenders that do accept students without a co-signer. These lenders typically have higher rates, but they use factors like a student’s major, academics and projected future income to determine eligibility. This opens the door to student loans even for students who don’t have a loved one willing to co-sign.

The risks of co-signing a student loan

Co-signing a student loan is not without its risks. By co-signing, the student loan becomes your responsibility as much as your child’s. Some of the pitfalls include:

  • Responsibility for payments: Co-signing on any type of loan means that you’ll be on the hook for the balance should the primary signer fail to make payment. Your loan is late immediately after the borrower misses the payment due date.
  • Increased debt-to-income ratio: A co-signed private student loan will show up on your credit report and affect your debt-to-income ratio. If you’re planning to make a big purchase soon, like a home or car, the new large loan could hurt your chances of qualifying for a home or auto loan.
  • Potential for credit damage: Payment history is one of the biggest categories that influence your credit score. If your child consistently misses payments on their loan or enters default, your credit score could take a big hit.

Tips for parents who co-sign a child’s student loans

After considering all of the risks, co-signing your child’s student loan might be the right choice for both of you. If that is the case, there are a few best practices and protections to keep in mind.

Lay the groundwork before signing the loan

Before co-signing a loan, it’s best to sit down and have an honest conversation with your child about taking on debt. Because the loan will affect both your credit and your child’s, the two of you should walk into the transaction with clear expectations.

For one, map out a payment schedule and help your child construct a budget, if necessary. Setting up autopayments can help here. You should also have a discussion about what happens if your child cannot make a payment.

Many lenders offer a co-signer release

Almost all private student loan lenders offer co-signer release. Under this agreement, the co-signer can be freed from financial responsibility after the primary borrower meets certain requirements — usually 24 to 36 consecutive, on-time payments.

Those seeking a co-signer release should contact their lender for more information and to create a plan. Co-signer release can also be one of the details you look for when comparing lenders and applying.

Refinancing can remove your responsibility

Once your child has established some credit, refinancing the student loans might be a good idea. In doing so, the loan will be made to them directly, and you will be able to have your name removed from the balance entirely.

Keep in mind that if they don’t have good enough credit to qualify for a low interest rate, refinancing might make their loan more expensive and harder to pay off. Encourage your child to make on-time payments after graduation so they can build their credit. It helps with not only possibly refinancing, but also with any potential borrowing opportunity, like applying for a credit card or getting an auto loan for a car.

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Written by
Dori Zinn
Contributing writer
Dori Zinn has been a personal finance journalist for more than a decade. Aside from her work for Bankrate, her bylines have appeared on CNET, Yahoo Finance, MSN Money, Wirecutter, Quartz, Inc. and more. She loves helping people learn about money, specializing in topics like investing, real estate, borrowing money and financial literacy.
Edited by
Student loans editor