Graduation cap turned upside down to collect money next to a sign that says student loans

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Most students today need student loans to pay for school. The only problem is, many people go to school when they’re young and haven’t yet had time to build very good credit.

This isn’t an issue for most federal student loans, where approval and loan interest rates aren’t contingent on a borrower’s credit. But it can become a big problem for private student loans. The issue can also arise with Direct PLUS Loans, which you can’t obtain if you have an adverse credit history.

Students looking for private student loans may need a cosigner if they can’t qualify on their own, and those looking for Direct PLUS Loans may need an endorser (which is basically a cosigner) if they can’t get approved with their own credit. So if a would-be scholar asks you to be a cosigner, you’ll need to make sure you understand the responsibility you’re taking on before you say yes.

Becoming a student loan cosigner can have big implications for you. It can affect your debt-to-income ratio for years to come, and you could end up legally responsible for paying back the student loan if the borrower can’t. You need to carefully consider the pros and cons because deciding to cosign isn’t a choice to be taken lightly. This guide to becoming a student loan cosigner will tell you everything you need to know.

Cosigning means you’re legally responsible for the student loan debt

When you cosign a loan, you are guaranteeing the loan and putting your finances on the line. Lenders consider your income and credit score in evaluating the likelihood the loan will be paid back. And if the primary borrower cannot pay back the loan, the lender will come after you.

If the primary borrower on the loan doesn’t pay off the loan in full, lenders could pursue legal action to try to collect from you. This could include garnishing your wages, putting a lien on your property, and using other aggressive debt collection efforts.

Because collectors have so much power to take legal action against borrowers and cosigners, you will almost assuredly end up having to pay back the money if the primary borrower doesn’t -- especially as student loans are dischargeable in bankruptcy only in very rare cases when undue hardship can be demonstrated.

While you may assume the primary borrower will pay back the loan, remember there are no guarantees. People can have a hard time getting a job, or could get sick and become unable to work -- leaving you on the hook for paying back the loans they can’t afford.

The debt doesn’t necessarily go away if the borrower dies

In general, federal student loans have death discharge provisions so if the student who took out the student loan dies, the debt doesn’t have to be paid back.

But many private student lenders do not have death discharge policies. So if you cosign for student loans for someone and tragedy strikes, you could end up responsible for paying back the entire remaining balance of the outstanding student loan debt.

Your credit is on the line when you’re a cosigner

When you cosign for federal student loans, you’re also gambling your credit score. If the primary borrower misses payments, this will show up on your credit report. Often you won’t even know the payments are being missed until your credit score falls.

Your debt-to-income ratio is affected, too

Because student loan debt you cosign for shows up on your credit report, it affects your debt-to-income ratio (DTI). DTI is a ratio that looks at monthly debt payments versus your income. Many lenders, including mortgage lenders, look at your DTI when deciding whether to lend to you.

If your DTI ratio appears too high because of the student loans on your credit report, you may not be able to get a loan for your own needs if you decide to buy a house, buy a car, or take out a personal loan. Or, the higher DTI ratio could mean you get a less favorable interest rate. Be aware that co-signing for someone could affect your own access to credit in the future.

Student loan debt can take a long time to pay off

Many student loans have long repayment terms, with borrowers given a decade or longer to pay off the loan balance. This means the debt could stay on your credit report for a very long time, affecting your borrowing abilities over many years.  

Cosigner release is possible on some student loans

There is some good news for cosigners though. Many lenders allow cosigner release after a certain number of on-time payments are made. This means that if the primary borrower complies with requirements and makes payments on time over several years, it is possible you could be released from your obligations as a cosigner in less time than it takes to pay off the loan in full.

If someone asks you to cosign and you decide you’re willing to take the risk, you should steer the borrower towards loans offering cosigner release whenever possible. This at least allows you to minimize the likelihood you’ll be stuck with legal responsibility for loans for a decade or longer.

Should you agree to cosign student loans?

As you can see, becoming a student loan cosigner could affect your finances in many ways. As a student loan cosigner, you become responsible for paying the loan if the primary borrower doesn’t. You could also be stuck paying the loan if the primary borrower passes away, depending on whether death discharge is possible. In addition, the loan could affect your debt-to-income ratio and, if the primary borrower misses a payment, could hurt your credit.

Despite these downsides, you may still want to cosign a loan because it could be impossible for a young person in your life to pay for school unless you do. This is an especially common situation parents find themselves in. Before you agree to cosign, make plans to protect yourself. This could include looking for private loans with cosigner release and with death discharge policies, as well as making a plan with the primary borrower for when and how the loan will be paid off and what will happen if a payment can’t be made.

By thinking through all possible outcomes up front, you can take steps to cosign responsibly so you can help your loved one get an education while minimizing the risk to your own financial future.