What To Know Before Co-Signing a Student Loan

by Gary Foreman

Before Co-Signing a Student Loan photo

Sure, student loans can get your kid a degree. But they can also land them, and you, in a heap of debt if you co-sign and they are unable to pay.

Should you co-sign a student loan for your child or grandchild? Helping them pay for college would seem like a no-brainer, especially if they ask you for help. After all, we want the best for them and their future.

Plus, you’ve read that college grads earn more than high school graduates. It’s common knowledge that the cost of college keeps climbing. And most potential students simply don’t have enough money saved to pay for college without help from somewhere.

You’ve also read that co-signing student loans is quite common. It’s estimated that 90% of all private student loans are co-signed. (source: LendEDU.com survey)

But co-signing a student loan might be a very bad decision not only for you but also for your student. Let’s examine what’s involved, look at the positives and the possible consequences of co-signing a student loan.

Things To Know and Consider Before Co-signing a Student Loan

First, let’s take a look at the things you should know and consider before you agree or decline to co-sign a student loan for your child or grandchild.

Make sure you know the what you’re signing

When you co-sign a student loan, you’re signing a contract. As in any contract, you should know what you’re signing. Evaluate the risks. Be familiar with the details.

You need to understand that it’s the exact same as if you took out the loan yourself. The lender will expect payment from your student or you. Legally, there’s no difference if you co-sign.

Know how and how long the loan will affect your credit score

Even if every payment is made on time, just co-signing the loan will affect your credit score. Remember that student loans often run into the tens of thousands of dollars. That can make a big difference in the amount of available credit that you’re using. It could prevent you from getting a car loan or affect the rate you pay for other types of loans.

Keep in mind that co-signing a student loan is a long-term commitment. Even though the Standard Repayment Plan for federal loans says that payments will be complete in 10 years, that assumes that every payment is made on time and that the loan is never frozen.

For example, loans were frozen during COVID. In fact, “20 years is how long it takes the average indebted graduate to pay off their student loans” (source: EducationData.org)

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Know how much the loan could ultimately cost you

Co-signing can obligate you to more than the face value of the loan. Remember that interest accrues on the loan whether it’s being repaid or not. That will add to the amount owed. So can any penalties for late payment. In fact, “1-in-5 borrowers see their total student loan debt increase in the first five years of repayment.” (source: EducationData.org)

Unlike federally subsidized loans, private student loans start accruing interest as soon as you get the money. If payments are delayed until graduation, the interest owed is added to the principal — in effect, compound interest in reverse.

One way to protect yourself is to include a ‘co-signer release clause’ in the loan agreement. That would allow you to be released after your student makes a certain number of on-time payments and a good payment history. Unfortunately, some lenders will not agree to include this clause.

Consider how co-signing could affect your relationship with your child or grandchild

There’s a non-financial aspect to consider, too.

You want to have a good, open relationship with your children/grandchildren. That relationship can change significantly when money is involved. Your son or daughter might feel added pressure knowing that you’d have to make up any shortfall on their part. If they should fall behind, you’ll be tempted to lecture them about their spending habits. Even if you don’t, they may be embarrassed to be around you if they’re not making on-time payments.

It might be difficult for your child or grandchild to admit that they haven’t been making on-time payments. They don’t mean to lie but can’t bring themselves to confess the truth. The lender is required to give you the current status of the account if you ask. So be prepared to check the loan status regularly. Your child’s action (or inaction) aside, the fact that you weren’t aware of any late or missed payments will not protect your credit score or gain you any grace from the lender.

Consider what your student is buying with the student loan

Many colleges hide the fact that not all degrees have equal value in the marketplace. Some don’t provide a career path for the graduate. That’s why so many grads end up working at minimum wage jobs. They’ve borrowed a lot of money to buy something that had little value.

Find out what course your student plans on pursuing. Will it provide high-paying job offers at graduation? When they graduate, if their McJob can’t keep up with student loan payments, you’ll be called upon to make up the difference.

Reasons you might want to co-sign for a student loan

Now that we know something about what’s involved with co-signing a student loan, let’s look at the reasons why you would co-sign for your child or grandchild.

A degree offers a better chance at a better salary

On average, college grads earn more than high school grads. The earnings gap between college graduates and those with less education continues to widen. Today, a college graduate earns 68%  more than those with just a high school diploma. (source: Bankrate.com)

Helping your student obtain a marketable degree could make their financial life more manageable.

You can help them now rather than later

Co-signing a student loan could be a good tool for transferring wealth between generations.

If you plan on leaving an inheritance to your child/grandchild and know that you won’t need the money during your lifetime, co-signing could be a way of giving them their inheritance while you’re still alive. (Of course, you could just give them the money now.)

You can help them build their credit

You might want to help your student build their credit and risking your credit isn’t an issue. That would require you to be in a financially secure position where your credit score is not important.

Reasons you shouldn’t co-sign for a student loan

Admittedly, the reasons why you should co-sign are fairly limited. Unfortunately, the reasons why you shouldn’t co-sign for your child or grandchild are more numerous.

Late payments could hurt your finances and your credit score

Your student might not be as responsible about paying bills as you are. Any late or missed payments will hurt your credit score. And they could earn late payment penalties that you would be responsible for.

To make matters even worse, the lender is under no obligation to let you know that payments are late or being missed. Your first knowledge could be when they demand payment from you.) Once again, check the status of the loan regularly if you do decide to co-sign.)

Late payments by your student will lower your credit score. Even if you’re not aware of them. That could mean that your lifetime of earning good credit is wiped out.

Lenders have the right to raise interest rates on the loan for late payments. Just like credit card companies do. Some are allowed to raise rates based on market rates. That means that even if the borrower does everything right, the rate could go up significantly.

Late payments could trigger calls from debt collectors. They’re trained to be aggressive and persistent. You do have rights, and they can’t harass you, but it can be disconcerting to be contacted by a collection agency for payments that you didn’t miss.

And, if you’re still working, lenders can garnish your wages. A private lender would need to get a judgment first. That’s not required for a federal student loan.

If a co-signed loan ruins your credit, you won’t be able to help your child or grandchild when they need it most.

Student loans cannot be included in bankruptcy and many can’t be forgiven or discharged

Private student loans are not forgiven. Under some provisions, government student loans can be reduced or forgiven if the graduate performs some type of public service. Not so with private loans. If you co-sign, someone (either the student or you) will have to repay it.

Private lenders are much less generous than the federal government when it comes to deferment and forbearance options. ‘Economic hardship’ is rarely allowed on private student loans. The lender doesn’t care if your student lost their job and it wasn’t their fault.

As a general rule, student loans cannot be included in a bankruptcy. Neither you or your student can declare bankruptcy to get out from under a burdensome student loan.

Neither your death or the death of the student will discharge a private student loan. The debt becomes a creditor of the estate. If your student dies, there’s a good chance that the estate will not be large enough to repay the loan. Not only will you have lost a child, but you will have inherited a debt. One way to mitigate that potential problem is to have the student take out a life insurance policy large enough to repay any loan balance.

Your student may not graduate

It’s also possible that your student won’t get the degree they pursued. “College dropout rates indicate that up to 32.9% of undergraduates do not complete their degree program.” (source: EducationData.org)

Without the degree, their earning potential (and ability to repay student loans) is limited.

Non-financial reasons not to co-sign a student loan

Some non-financial reasons might prevent you from co-signing a student loan.

Preventing your student from taking out a loan could be the best financial lesson that you could teach them. Not having to pay for a student loan after graduation allows them to get on with their life sooner (marriage, buying a car or home, etc). Working their way through college could give them a head start on those who didn’t work while in school.

Your student might also learn that a private student loan is not the only source of money available. For instance, the Parent PLUS Loan is a federal student loan available to the parents of dependent undergraduate students. It offers a fixed rate of interest. The parents do need to have a good credit history/score, but not as good as most private loans require.

Scholarships are a free alternative to loans. They are gifts that don’t need to be repaid. There are thousands of them offered by schools, employers, individuals, private companies, nonprofits, communities, religious groups, and professional and social organizations.

Finally, remember that school counselors are not financial advisors. Most are happy to encourage you to take out a student loan. Their goal is to get students enrolled. Whether you’re able to repay a student loan is not part of their responsibility.

Should you co-sign a student loan? In a few cases it does make sense. But for most of us, it’s a bad choice that can lead to serious life-changing consequences later.

Reviewed February 2024

About the Author

Gary Foreman is the former owner and editor of The Dollar Stretcher. He's the author of How to Conquer Debt No Matter How Much You Have and has been featured in MSN Money, Yahoo Finance, Fox Business, The Nightly Business Report, US News Money, Credit.com and CreditCards.com.

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