The Financial Impact of Cosigning a Student Loan

In most cases, college students can obtain federal student loans independently, without needing a cosigner. However, there are instances where a cosigner is necessary. For example, the Federal Direct Parent PLUS loans can be secured by parents on behalf of their dependent children to support their educational expenses. Additionally, when students pursue private student loans, they often face stringent credit criteria that may hinder their ability to qualify on their own.

So, is it wise to cosign student loans for your child? Should you consider cosigning on any loans they are unable to secure by themselves? It’s certainly an option to weigh, but it’s crucial to fully understand the implications — both positive and negative — before making a decision.

The primary benefit of cosigning is the assistance you provide your child (or dependent) in acquiring funds for higher education that they might not obtain otherwise. That said, it also carries significant risks. Here’s what you need to know before you finalize the agreement.

You are responsible for the debt regardless of circumstances

Regardless of whether it’s a Parent PLUS loan or a private student loan with your child as the primary borrower, you must recognize that you are legally obligated to repay this debt. If your child fails to make payments, the responsibility to fulfill these obligations falls to you. Should your child neglect their duties and stop making payments altogether, you will have to cover that loan.

Cosigning a student loan resembles entering a joint mortgage or a car loan agreement. Both parties share the responsibility of repayment, irrespective of each other’s actions. This can lead to complications if your child does not prioritize their financial responsibilities; however, if they manage their credit responsibly and consistently pay their bills, it might not be issue.

Bankruptcy won’t erase student loans

Another important fact to recognize is that student loans are seldom discharged in bankruptcy. Generally, these debts persist indefinitely unless the borrower passes away or can demonstrate severe hardship.

As a parent, you’re likely trying to build savings for retirement and achieve other financial milestones, so it’s essential to be aware that the student loans you cosign will remain on your shoulders until they are fully repaid.

Once signed, it’s hard to retract

When you cosign a student loan, you’re unable to simply withdraw your agreement later. Your child may seek to refinance their student loans in their own name, but this is only feasible if their credit score is high enough to qualify for refinancing independently. If they were capable of that, they wouldn’t have needed a cosigner in the first place.

Your financial status may be stable now, but consider how it might change in the next five to ten years. If retirement is on the horizon, you might not want to burden yourself with your child’s student loan payments. Additionally, unforeseen changes in your health or career can impact your financial situation in the future. Cosigning for student loans ensures you’ll be financially tied to them, and extricating yourself can prove challenging.

Cosigning could impact your credit rating

By cosigning a student loan, you’re jointly taking on the responsibility for that debt and any repercussions that arise from late payments or defaults. Therefore, you should only agree to cosign if you are confident that your child or dependent is committed to making timely payments and avoiding default.

If you’re not vigilant, your credit score can suffer significantly without your knowledge. Given that payment history accounts for 35% of your FICO score, even one late payment can inflict considerable damage. Imagine the consequences if the student loans you cosigned consistently encounter late payments. If you are not actively monitoring the situation, you might find out about the adverse effects only after they have occurred.

The final thoughts

There are circumstances where cosigning on a student loan can be beneficial, but this choice should be made with caution. While you may be helping your child pursue their education, the potential risks are considerable. (See also: Should You Co-Sign a Loan?)

Before you sign, consider the professional field your child aims to enter and assess their potential earnings upon graduation. Some sectors may offer promising opportunities, while others may not; this knowledge is crucial before committing financially. Perhaps your college student could even focus on building their credit score to independently qualify for student loans.

Ultimately, cosigning for student loans should be viewed as a last resort rather than a straightforward solution for students who haven’t fully explored their options.