Understanding the Risks of Cosigning Student Loans for Your Child

Aww… Your son or daughter is now all grown up. In what seemed like a blink of an eye, your child went from skinned knees to prom and now college. Of course, college is about as affordable these days as buying your own sapphire mine, so before the tearful goodbyes and posting on social media, there’s the issue of college tuition and student loans. Let’s look into this issue as it applies to being a cosigner, which can also apply to other types of debts such as mortgages and SBA loans.

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Key Points:

• Co-signing student loans could burden you financially if the borrower can’t repay.
• As a cosigner, late payments can hurt your credit score.
• You are liable for the entire loan amount if your child doesn’t pay back the lender.
• If possible, apply for federal student loans, which usually don’t require a cosigner and may have better terms.

The Shift from Student Loan Lenders

I know what I am about to say makes me sound like an old guy, but “back in the day,” having parents or grandparents co-sign student loans was unheard of. When I first started seeing this requirement from student loan lenders, I knew it was nothing short of a money grab and another attempt for creditors to protect themselves. There never really was an issue in providing student loans or collecting upon them. So why are lenders now requiring cosigners?

Student loan lenders realized at some point that graduates have minimal assets. However, parents at that stage of their lives are more settled financially. If payments are not made on the student loans, the student loan lender could always sue both the borrower and cosigner and maybe even attach liens to the property. There’s a reason that the fastest growing group filing for bankruptcy is the older generation. This is known as the graying of bankruptcy. Add to that the issue of us silver-haired focus with student loans. That’s known as the silver-haired tsunami.

What Cosigning a Student Loan Means on Your Credit Report

Co-signing a student loan is no different legally than co-signing a car loan or mortgage. It could impact your finances. For example, since the student loan is a debt, like any other debt, it will be listed on your credit report. How does this affect your finances?

Imagine you are seeking to refinance your mortgage or buy a new car. A lender can easily reject your application if your debt balance is too high. Likewise, any late payments on the student loan will hurt your credit score, even if you aren’t the one making the payments. However, if your child has poor credit, or even yourself, timely payments will help improve your credit score. But as stated before, remember, late payments will affect both of you.

The Financial Risks of Cosigning

By co-signing a student loan, you and your child are both on the hook for the total amount, plus interest and fees. Any lawsuit will also result in attorney’s fees. Because you are legally responsible for the loan, both the borrower and co-signers will get sued. If it reaches the final stage, where the lender gets a judgment, they will seek to enforce that judgment, and usually, it will be done with the parent who has more assets. A wage garnishment is also possible.

Since student loans are long-term debt lasting anywhere from ten to twenty years, as a co-signer, you’re responsible for the loan until it’s paid in full. It gives you something to think about.

A Benefit of Being a Co-signer

As a co-signer with a long credit history and good credit, you can qualify for private student loans, but the interest rates tend to be higher than federal loans. This could result in tens of thousands of dollars spent on interest.

Refinancing a Mortgage as an Alternative to Student Loans

Refinancing a mortgage might be an excellent alternative to co-signing on student loans. However, there should be sufficient equity to allow for the refinance. Also, like student loans, a refinance could add another ten to twenty years to the mortgage. Still, it could be a good financial choice, especially if you can deduct the mortgage interest on your taxes and do not intend to sell anytime soon.

However, one issue that comes to mind, having experienced this myself, is the ups and downs we have seen in the real estate market dating back to the mortgage foreclosure crisis of 2008. Many of us woke one day to realize our house or mortgage was “underwater.” Having negative equity at the time of retirement could be a financial disaster.

At least for me personally, even though I don’t have kids, this wouldn’t be an option I feel comfortable with. I’m still feeling the long-term effects of a foreclosure. Besides having bad credit for years and working hard to rebuild my credit, the 2008 Hurricane Season resulted in me getting an SBA loan to cover the damages to my house. The house went into foreclosure, thanks to the mortgage foreclosure crisis. Now, sixteen years later, guess who is knocking on my door to collect? Yes, the SBA.

I have to get into this issue with a separate blog post, but SBA loans are different from your typical loan. While an SBA loan can be discharged in bankruptcy if there’s a foreclosure, there’s no statute of limitations where the time to collect expires. Also, the federal government is entitled to administrative offset, which means if they can’t collect initially, they will collect when you receive Social Security benefits.

It’s no wonder I have financial PTSD when it comes to hurricanes. I also curse the SBA regularly. It helps me feel better 😉. Trust me, try it sometime. Just make sure no one sees you. Take a deep breath and yell: &^%$&** SBA! It works with any creditor as well. You’ll thank me.

Should You Cosign the Student Loan for Your Child or Grandchild?

If there is one phrase lawyers use regularly, it is “It depends.” Every situation is different. But to sound cliché, start at the beginning. Ensure your child has submitted the Free Federal Student Aid or FAFSA application. They may qualify for federal student aid, grants, or federal student loans, and credit history isn’t likely to be an issue.

Ultimately, you should approach the issue of co-signing student loans by asking yourself if you could you afford to pay back this debt on your own. You should also ask that question about being a co-signer or co-borrower with any debt.

The reality is we cannot predict the future, and whether it’s a disability or, I hate to say this, but the death of your child, you could be responsible for the total amount of the loan. So, read every clause of the loan documents to confirm if any exceptions will protect you in an unexpected emergency.

Best of luck to you and your child(ren) as they pursue their dreams.

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• Bankruptcy
• Your Wallet

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Please note that the information on this site does not constitute legal advice and should be considered for informational purposes only.

Updated on March 31, 2025.