Do Parents Have To Cosign Student Loans?

A cosigner can improve your chances of student loan approval and help you land a better interest rate. Navy Federal Credit Union reports that 9 out of 10 of its student borrowers have a cosigner. While many borrowers require cosigners for private loans (often, but not always, a parent), you can qualify for federal loans without one, thanks to the lack of a credit check for most loan types.

Here's what you need to know about parents cosigning your private student loans, and some alternatives to consider.

Current private student loan rates

Do you need a cosigner for federal student loans?

Federal student loans generally don't require cosigners. Eligibility for Direct Subsidized and Unsubsidized Loans isn't based on your credit score. As a result, you can qualify even if you have poor credit (or no credit at all).

The only type of federal loan that may require a cosigner (in this case, known as an endorser) is a Direct PLUS Loan. This is the only federal loan that requires a credit check, and an endorser may be necessary if you have an adverse credit history.

As with other loans, the endorser on a Direct PLUS Loan agrees to repay the loan if the primary borrower can't. However, in the case of parent PLUS loans, the student can't be the endorser for their parent when the parent is taking out loans on their behalf.

When do private student loans require a cosigner?

Unlike most federal student loans, private student loan approval and interest rates are based on creditworthiness. If a borrower has a poor credit history (or, more likely for new college students, no credit history) or insufficient income, then a lender may require a cosigner.

“Having a cosigner with strong credit tells the lender that if the student can't make the payments, the cosigner likely can,” says Caroline Currie, assistant vice president of education lending at Navy Federal Credit Union. “That extra support can make it easier to get approved or get a better interest rate, especially if the student has a limited credit history.”

It's common for undergraduate borrowers to need a cosigner, but it's not always necessary. If you have a solid credit history and sufficient income to make your loan payments, you may be able to qualify for the loan on your own.

Who can cosign a student loan?

“Cosigners can technically be anyone with good credit, meaning a sufficient credit score and debt-to-income ratio,” says Jack Wang, a wealth adviser with Innovative Advisory Group who specializes in college financial planning. “Typically, cosigners are parents or grandparents, or anyone who has a relationship with the borrower.”

While a cosigner for undergraduate students is often a parent, it doesn't have to be. The most important factor is that the cosigner meets the loan's eligibility criteria, including minimum credit score, income, citizenship or residency, and anything else the lender requires.

What are the risks of cosigning a loan?

When you agree to cosign a loan, you take on equal responsibility for the loan as the primary borrower. If the borrower stops making payments on the loan, the lender will expect you to make them. And if you can't (or won't), it's likely to negatively affect your credit score.

Additionally, when the loan goes into collections, the lender or debt collector will reach out to you just like the primary borrower. Many cosigners never anticipate actually having to follow through on their agreement to repay the loan, but it can happen.

And unfortunately, cosigning a loan can have negative repercussions even if the borrower doesn't miss any payments. According to Wang, the loan appears on your credit report, affects your debt-to-income ratio, and can prevent you from being approved for new credit transactions, including getting a car loan at a low rate or refinancing your mortgage.

Can parents be removed from a loan later?

In some cases, it may be possible to remove a cosigner, including a parent, from the loan. The first way this happens is through a cosigner release.

“Some lenders have cosigner release options, which will remove the cosigner after the borrower makes a number of consecutive on-time monthly payments (typically 12, 24, 36, or 48) and satisfies credit criteria,” says Mark Kantrowitz, financial aid expert and author of “How To Appeal for More College Financial Aid.”

“In other words, they must be capable of obtaining the loan on their own, without a cosigner,” he adds.

But according to Kantrowitz, lenders often use intentionally strict criteria to release cosigners. In the case of student loans, lenders know that parents sometimes make the loan payments. They want to ensure that, if the parent is making the payments and is released from the loan, the primary borrower can afford to take over the payments.

Another option to remove a parent from a student loan is to refinance the loan under just the primary borrower's name. Like a cosigner release, this requires the borrower to qualify for the loan themselves, but it can be a good option if your student loan lender doesn't offer a cosigner release.

“It usually takes several years after graduation for a student to build a great credit history by making on-time payments on all their debts, never being late with a payment,” says Kantrowitz.

Alternatives if a parent won't or can't cosign

Having a parent cosign a loan isn't an option for every borrower. It may be the case that your parent doesn't have sufficient credit to cosign a loan or simply doesn't want to. In that case, you still have options to help you pay for school.

“If you don't have a cosigner, start by using all the federal student aid you can,” advises Currie. “Look for scholarships or grants — millions go unclaimed every year — and check out state-based or institutional loan programs and employer tuition assistance programs. These options can reduce how much you need to borrow and help you pay for school without a cosigner.”

Another option is to shop around for a different private loan. While your credit may be less than ideal, some lenders offer non-cosigned loans, even for borrowers with bad credit. Building your credit and income before applying for a loan is also an option.

Finally, if your credit is truly preventing you from accessing the funds you need to pay for school, consider whether you can reduce your borrowing needs by attending a more affordable school or finding alternative sources of income that can help you cover the difference.