Should I cosign a student loan? How to tell (plus cosigner FAQs)

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Becoming a cosigner isn’t something you should take lightly. Saying “yes” could mean getting a loved one the money they need to fund an education and kickstart their future. But it’s not without its potential drawbacks. If you’ve been approached by a student and you’re wondering “should I cosign a student loan?”, here are 7 questions to answer before you make the decision.

Has the borrower exhausted other forms of funding?

Before you cosign a student loan, make sure that the borrower has exhausted all other forms of funding. Before a student even considers asking you to cosign, they should’ve applied for scholarships, grants, and filled out a FAFSA form (Free Application for Federal Student Aid)  to receive financial aid.¹

If these don’t get them the money they need, your student should apply for federal loans first. Compared to private lenders, the federal government offers more flexible repayment plans and has more forgiving relief options should the borrower fall on hard times. Plus, federal loans don’t require a credit check, and most don’t require a cosigner.

There are two main kinds of federal student loans for college students: Direct Subsidized Loans (for undergraduate students only) and Direct Unsubsidized loans, which are for both undergrads and graduate students.

• Subsidized loans are for student borrowers with demonstrated financial need and do not require a student loan cosigner, nor for the student to demonstrate creditworthiness. If your student meets eligibility requirements for subsidized loans, they will not accrue interest on the balance of their loans while they are in school.

• Unsubsidized loans are available to all undergraduate and graduate students regardless of financial need. They start accruing interest as soon as they are disbursed, but, like subsidized loans, do not require monthly payments until after a grace period following graduation.

Students do not have to meet any credit requirements to access federal loan options.

The most important thing to remember is that federal student loan repayment options are more flexible than loans from private student loan lenders. This means that it will be easier for your loved one to request a period of deferment or forbearance — a hiatus from making payments — or to temporarily reduce their required monthly payments if they’re not making enough money to pay them.

Although interest rates for federal loans can be higher than those from private lenders if you have excellent credit, there are several ways to access loan forgiveness through the federal government if your student works in a qualifying career. This means that they may end up paying less money over time by borrowing from the federal government, even if lower-interest loan options are available to them elsewhere through a cosigned loan.

Have you applied for a Parent PLUS loan?

A Parent PLUS loan is a federal student loan that parents can take out to help pay for their child’s education. The PLUS stands for “Parent Loan for Undergraduate Students.” These loans are available to any parent or guardian of a dependent undergrad, as long as they’re a U.S. citizen or eligible resident and don’t have any adverse marks on their credit history, such as defaulting on a previous loan or missing credit card payments.

Parents can take out PLUS loans up to the full cost of attendance of their child’s institution, minus any other financial aid the student has already received, including other federal student loans.

Unlike student loan payments for undergrads, parents have to start paying down PLUS loans as soon as they’re disbursed, and interest will accrue immediately. There are no subsidized PLUS loans.

Parents who aren’t eligible for PLUS loans because of adverse marks on their credit history can apply with the help of an endorser who agrees to pay the loan if the primary borrower can’t — just like a cosigner for a private loan.

Are you financially stable enough to be a good cosigner?

A good cosigner is, first of all, someone who’s financially secure and has a low debt-to-income ratio. Ideally, a cosigner should be in a position where taking on the monthly payments will not cause financial stress or hardship. This person should also be able to take on a guiding role to help the primary borrower understand the loan terms and make a plan to pay down their student loan debt.

The best cosigner will also have an excellent credit score. The higher the cosigner’s credit score is, the less risky the loan will be for the lender. That means the primary borrower will get a lower interest rate, and pay less money in interest over time.

It’s important to remember that a cosigner’s role is not limited to just making sure the borrower pays their bills on time each month. As a cosigner, it’s also important that you’re able to afford your own expenses in case something unexpected happens, like losing your job. If there’s any doubt about whether or not being a cosigner will work out for both parties involved, then it may be best to reconsider your options.

Does the borrower have time to improve their credit score?

If the student has time to improve their credit score, they may be able to qualify for loans on their own. There are several ways a student can establish credit. Here are just a few ideas.

Get a credit card

The easiest way to establish credit as a young person with no credit history is to get a credit card. While the options for a first-time borrower may be limited, you may have luck getting a card through a local credit union or getting a card focused on young student borrowers. Make sure your student understands how to avoid spending more than they can afford. Help them make a budget so they can pay off the card in full at the end of each month and avoid racking up debt or missing payments.

Pay down federal student loans

Federal student loans are a fairly easy way to establish credit history because students do not need to prove creditworthiness in order to receive them. Even if they have zero credit history, they can get Direct Loans. Making payments on these loans while they’re in school, even if it’s just a few dollars a month, can help them save money on interest over time and may help give their credit score a boost.

Earn an income

Debt-to-income ratio is a key component of any credit score, and is basically the measure of how much outstanding debt one has in comparison to their annual salary. While it may not be possible for your student to get a job with a high salary, making even a small amount of income over the course of a year could vastly improve their debt-to-income ratio over having no job at all.

Make them an authorized user of your credit card

If you have a credit card and you’re in good standing with the lender, you may be able to add your student to your account as an authorized user. If you do this, they’ll get a credit card with their name on it that’s linked to your account. This can be an opportunity to teach your child responsible spending habits, and for them to prove their trustworthiness. If the account remains in good standing, this may reflect positively on your child’s credit history. It’s important to remember, though, that if you miss a payment or start racking up a lot of debt without paying off the card in full each month, this may impact both your credit and your child’s negatively.

Do you trust the borrower to pay back the loan on time?

Before you agree to cosign a loan, you should have an in-depth conversation with the primary borrower to make sure they have a plan to pay it back. Do they know how much their monthly payments will be after graduation? Do they know how to make a budget? Do they have a plan for how they will repay the debt? What will they do if they realize they can’t make payments?

A student who’s ready for the responsibility of taking out a loan that could have a huge impact on their loved one will be able to answer these questions. Or, at the very least, they’ll be willing to sit through the conversation with you and take the discussion seriously. A student who dismisses the conversation or tries to put it off as “a problem for the future” may not be ready to take on this kind of responsibility.

Are you willing to repay the loan if the borrower cannot?

As a cosigner, it’s your job to make sure the borrower is able to pay back the loan on time. Missed payments and late payments will appear on your credit report, too, which can make it harder for you to meet your own personal finance goals like qualifying for a mortgage or business loan.

If you’re not in a position where you can take on the student’s debt without causing financial hardship, it may not be the best time for you to cosign. Even if you think it’s extremely unlikely that you’ll have to take on your student’s payments, it’s important to consider the worst-case scenario, and how that might affect your relationship with the cosigner.

Are you applying for other types of loans in the near future?

If you’re applying for other types of loans in the near future, such as a mortgage or auto loan, then it might be a good idea to hold off on cosigning student loans. The reason? Cosigning a student loan can add to your debt. And a higher debt-to-income ratio (how much money you owe compared to how much money you make) makes you a riskier lender, which makes it harder for you to get approved for other loans. Not only that, but if the borrower misses payments, it can affect your credit score too. This can add even more difficulty to taking out a new loan.

FAQs about cosigning a student loan

Still wondering whether you should cosign a student loan? Here are some answers to common questions.

Can you get out of being a cosigner after you sign?

It’s important to know that once you sign, you’re legally obligated to pay back that loan. Generally, you get out of being a cosigner once the loan is paid off in full. However there are some ways around this:

• If the borrower meets certain standards (like making a certain number of on-time payments), they may be able to apply for a cosigner release from their lender. Not all lenders offer cosigner release options, so make sure you ask about this before you sign.

• Some lenders offer student loan refinancing with lower interest rates and more manageable terms.² If your student is in a better financial situation, they may be able to refinance their loans on their own –– at which point you would be relieved of your duties as cosigner.

Who can cosign a student loan?

The good news is that you don’t need to be a parent or grandparent to cosign a student loan. A person could also be your sibling, another family member, or even a friend.

There are, however, a few criteria. You must be the age of majority in your state, a legal US citizen, and it’s recommended you have a steady income and good credit history to qualify for this responsibility.

Does cosigning a student loan affect your credit?

Yes, cosigning a student loan can have an impact on your credit.

When you cosign, the lender will perform a hard credit pull and report it to the three main consumer reporting agencies. This can lower your score by a few points because of the added inquiry. There’s also a risk that if the borrower misses payments or defaults on their loans, that record will be reported as well — which could hurt both borrowers’ credit scores.

See how much you could save with Earnest

There are many reasons why you should cosign a student loan. It can help the borrower get approved for a loan with lower interest rates and better terms than they would have otherwise. Ultimately, it could kickstart their professional future.

However, as a cosigner you need to be prepared for the worst-case scenario. Are you willing and able to repay the loan if the borrower defaults? If the answer isn’t a resounding yes, it might be time to explore other options.

Ready to see what you could save with an Earnest student loan? Use our free rate calculator to see how much you could save with Earnest. It takes minutes, and it won’t impact your credit score.

This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.

¹ Before applying for private student loans, it's best to maximize your other sources of financial aid first. It's recommended to use a 3-step approach to assembling the funds you need: 1) Look for funds you don't have to pay back, like scholarships, grant and work-study opportunities. 2) Next, fill out a FAFSA® form to apply for federal student loans. Federal student loans do not require a credit check or cosigner, and offer various protections if you're struggling with payments. 3) Finally, consider a private student loan to cover any difference between your total cost of attendance and the amount not covered in steps 1 and 2. For more information, visit the Department of Education website at https://studentaid.ed.gov.

² Choosing to refinance to a longer term may lower your monthly payment, but increase the amount of interest you may pay. Choosing to refinance to a shorter term may increase your monthly payment, but lower the amount of interest you may pay. Review your loan documentation for total cost of your refinanced loan.