What To Know Before Cosigning a Student Loan

Many students can't qualify for private student loans on their own because lenders require strong credit and steady income. That's why more than 90% of private student loans taken out in the 2023-24 school year included a cosigner, according to a recent report by Enterval Analytics.

If you've been asked to cosign a student loan, there are a few things you should know before you say yes. In this guide, learn how cosigning a student loan impacts your finances and if cosigning is the right move for you.

What does it mean to cosign a student loan?

Cosigning a student loan means sharing responsibility for the debt. As a cosigner, you're agreeing to repay the loan if the primary borrower — usually the student — can't.

“Many young borrowers, either college students or recent graduates, need private student loans but don't have the credit history to secure them on their own. A cosigner can help them get access to the funds they need,” says Glenn Sanger-Hodgson, a financial planner with Shonan Gold Financial LLC.

When students apply for private loans, they act as the primary borrower. However, if their income or credit history doesn't meet the lender's requirements, they'll need a cosigner to step in. In this case, the lender evaluates the cosigner's financial profile alongside the student's. The lender approves the loan based on the cosigner's credit and financial history, knowing they can rely on the cosigner to make payments if the student can't.

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Risks of cosigning a student loan

Cosigning a student loan comes with significant risks that can affect your financial future and credit score.

“The loan will be shown on the cosigner's credit report as a liability. The payment will be included in future debt-to-income ratio calculations and any late or missed payments will negatively impact the cosigner's credit score,” explains Curt Scott, certified financial planner and president of Scott Financial Group.

See Also: Consequences of Student Loan Default

Cosigning also impacts your credit immediately. “When you apply for a loan, you'll have an inquiry into your credit, which will lower your credit score on day one,” warns Domenick D'Andrea, financial adviser and co-founder of DanDarah Wealth Management.

Credit inquiries remain on your record for two years, and too many can lower your score.

“Another way cosigning could impact your credit is by changing the length of history on your report. When you initially open the loan, your total credit history will decrease, which might negatively impact your score,” adds Sanger-Hodgson.

Additionally, the loan remains on your credit report until it's fully repaid. This ongoing liability counts toward your debt-to-income ratio, potentially limiting your ability to borrow for other financial needs.

Benefits of cosigning a student loan

Cosigning a student loan can be a meaningful way to help someone achieve their educational goals.

By cosigning, you can significantly improve the borrower's chances of getting approved for a loan.

Cosigning also increases the likelihood of a lower interest rate from the lender. Lenders view loans with a well-qualified cosigner as less risky, which can result in more affordable borrowing terms for the student.

For borrowers with limited credit history or bad credit, having a cosigner can make the difference between securing an affordable loan or being unable to borrow at all.

If the loan is repaid on time, there's an added benefit for the cosigner. The positive payment history will show up on your credit report, potentially boosting your credit score over time.

For many people, the opportunity to help a child, grandchild, or loved one achieve their dreams outweighs the risks. Cosigning a loan can make higher education possible for someone who might not otherwise have the financial means to pursue it.

How to protect yourself as a cosigner

Cosigning a student loan comes with risks, but taking these steps can help protect your finances:

• Set clear expectations with the borrower: Talk about how much they plan to borrow, what their monthly payments will be, and how they'll afford the loan. Make sure they understand how missed payments could affect your credit and finances.
• Review the loan terms carefully: Understand the repayment terms and your responsibilities if the borrower can't make payments. This will help you decide if cosigning fits within your financial goals.
• Plan for the unexpected: “I often recommend the primary borrower take out a life insurance policy, as well as a disability insurance policy to protect the cosigner in case an unfortunate event happens,” says Glenn Sanger-Hodgson. Insurance provides an extra layer of protection in case of death or disability, since not all lenders discharge loans in these situations.
• Monitor loan payments: Keep an eye on the loan to ensure payments are made on time. If there's an issue, acting quickly can help you avoid credit damage.

You may be eligible for cosigner release

Cosigning a loan doesn't always mean you're committed for its entire term. Many student loan lenders offer cosigner release, which allows you to be removed from the loan after a set number of qualifying payments — typically 12 to 36, depending on the lender.

To qualify for cosigner release, the primary borrower must meet specific requirements, which often include:

• Proof of graduation
• Reaching the age of majority (legal adulthood)
• Providing proof of on-time payments for the required time period
• Meeting the lender's credit and income criteria
• Submitting an application for release

Applications for cosigner release are usually submitted online, and approval depends on whether the primary borrower can demonstrate they're capable of managing the loan without a cosigner.

If the lender doesn't offer cosigner release or the borrower doesn't qualify, refinancing is another option. Refinancing involves taking out a new loan with a different lender to pay off the old one. If the borrower qualifies on their own, the new loan won't require a cosigner, and your responsibility for the debt will end.