Refinancing student loans can be a good option for those with private education debt. By securing a refinance loan, borrowers can sometimes reduce their rate and total borrowing costs, and may be able to get other, more favorable new loan terms as well.
Unfortunately, to qualify for a student loan refinance, most private lenders require good credit and solid proof of income. And some younger borrowers who have just earned their degree may not have that. Lenders do allow cosigners, though, which could have some parents wondering if they should cosign for their kids.
Before you put your name on a student loan refinance application, you must think through the pros and cons to determine if it's the best course of action.
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The biggest reason to cosign for a student loan refinance
The biggest reason why a parent might want to cosign for a student loan refinance loan is to help out their child.
Education debt can be a huge financial burden, but refinancing private loans often helps ease that burden by making the debt cheaper and easier to pay if the new refinance loan has a better rate. Since refinance lenders consider credit and income, many young people wouldn't have the opportunity to qualify and lower their student loan costs without their parent's help.
It can be difficult to leave your child without this type of financial support, especially if your credit score and income are good, you're a well-qualified borrower, and your son or daughter is asking you for this assistance as they get their financial life started.
These are the reasons not to cosign for a student loan refinance
There are, however, some reasons not to cosign. Your own finances could be adversely affected in major ways.
If your child does not pay their loans on time and in full, your credit could be damaged due to a record of late payments and a default. You could be held responsible for paying the entire unpaid loan balance if your child stops paying -- and that could be tens of thousands of dollars you may not be able to afford.
Another issue is that when this debt shows up on your credit history, it affects your ability to borrow. Lenders treat it as your debt, and your debt-to-income ratio will be higher because of it. If you need to buy a house with a mortgage, borrow for a car, or take out loans to put other kids through college, you could run into trouble if you have a large student loan refinance loan on your record because you cosigned for it.
The good news is, you may not be stuck with the cosigned debt on your credit history forever. Many lenders allow cosigner release after the primary borrower makes a certain number of on-time payments. Sometimes, this is as little as 12 payments. But not every lender offers this option, so if you don't want the loans to be on your credit history for many years, you'd want to prioritize finding a lender that does.
Ultimately, you'll need to decide if you can and will help your child by cosigning a refinance loan. But don't take the decision lightly, as both your financial future and your child's financial future could be affected by your choice.
