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The Risks of Cosigning Student Loans

Parents are sometimes asked to cosign private student loans for their children. (Federal student loans do not require a cosigner.) Cosigning can help a child obtain a private student loan or get a lower interest rate on the loan. But, cosigning also carries a lot of risks that may not be completely understood by the parent. Cosigning a loan can be hazardous to the cosigner’s financial health.

Many parents mistakenly believe that a cosigner is a guarantor or contingent borrower, merely enabling the child to get a student loan. The obligations associated with cosigning are much greater. A cosigner is a co-borrower, equally obligated to repay the debt. Both the student and the parent are each individually responsible for repaying the debt.

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This has significant consequence for the cosigner’s credit. The cosigned loan is treated on credit reports as though it were borrowed by the cosigner because the cosigner really did borrow the money. It doesn’t matter if it is “really” the student’s loan, because the cosigner is also a borrower. This may make it more difficult for the cosigner to qualify for new credit, such as a refinance of a mortgage, because the student loans will be counted against the cosigner’s debt to income ratios. If the student is late with a payment or defaults on the loan, it is reported as a delinquency or default on the cosigner’s credit history, too. A single late payment will damage an otherwise good credit score for both the student borrower and his or her cosigner.

As soon as the student is late with a payment, the lender will immediately start seeking payment from the cosigner. There may be as much as a one in three chance that the parent may at some point be required to make payments on the cosigned loan.

Parents should never cosign a private student loan unless they are able and willing to make all payments on the loan. Parents or others with limited financial resources, such as relatives or friends on low or fixed income, should never cosign a private student loan.

Parents should also read the promissory note carefully, as cosigning a student loan may not only obligate them for the current loan, but also for all subsequent loans for the same period of enrollment.

So, before cosigning a private student loan, parents should ask themselves how much they trust their child to act responsibly. Has the child undergone financial literacy training? Will the child make all payments on time? Will the child treat the debt seriously? Does the child honor his or her obligations? Is the child careful or careless, organized or disorganized, trustworthy or irresponsible? Cosigning a student loan gives the student control over the cosigner’s credit and their financial future.

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