READ THIS BEFORE CO-SIGNING YOUR SON OR
DAUGHTER’S STUDENT LOAN
In 2017, data firm MeasureOne, found that approximately 92 percent of
undergraduate private student loans are issued to students with a co-signer.
Even though co-signing student loans is very common, those parents that are
interested in private student loans should understand the responsibility of
becoming a co-signer.
College should be an exciting time for you and your child, so take a look at these
five topics before signing on the dotted line.
Your credit will be affected when you co-sign a student loan
Your son or daughter may need a co-signer if they can’t qualify on their own. This
is usually the case if the student has not built credit or does not have any income.
Most lenders will look for a credit-worthy co-signer, but adding your name to the
debt will put your credit score at risk if there are late payments or if the loan
defaults. Remember, by co-signing, you agree to share the responsibility for this
debt. Something that I always recommend to parents is to add their child as an
authorized user on a credit card. This way, they can start establishing a credit
score. The account will show on your child’s credit report and the activity will be
recorded in their credit history. Keep in mind, an account with negative items
such as late payments or charge-offs will have the opposite effect and negatively
impact your son or daughter’s credit.
Discuss financial responsibility
Have a conversation on who will be financially responsible for this debt once
repayment starts. Will you be solely responsible, will the student be solely
responsible, or will you occasionally help out? You should also discuss what will
happen in the event your child runs into financial hardship. It’s also a good idea
to research the repayment plans as private student loans do not offer the same
repayment options as federal student loans.
Calculate the monthly payments and interest
You should figure out ahead of time what the monthly payments will look like. You
can find student loan calculators online and type in the principal amount, interest
rate, and loan term to get a better idea of how much the payments will be.
Remember, the longer that you take to pay off the loan, the more you will pay in
interest overall. If you make larger payments each month, you will save a ton of
money in the end. Again, the sooner you can determine if you can realistically
afford the loan amount, the sooner you can prevent hurting your credit.
Here’s an online calculator from Student Loan Hero you can use:
Make payments during school
The student does not have to wait until they graduate to start repaying the
student loan. By making payments while your son or daughter is still in school,
the debt will accrue less interest and the on-time payments will help your child
build credit. There’s also the option of being released as a co-signer that some
lenders offer if they see on-time repayment. However, first confirm with your
lender if they offer this option and what are the requirements to have this request
Discuss expectations with your child
It’s important to sit down with your son or daughter to discuss expectations
before you co-sign the loan. This is a great opportunity to determine how the debt
will be repaid. If you haven’t done so already, create a budget plan with your child
and discuss the importance of proper money management. If your child can get a
job, even if it’s part-time, or during the summer breaks, they can save some
money and have a cushion after graduation!
Remember, there are a lot of financial assistance options that can help your child
pay for school before applying for a private student loan. If your family does not
qualify for federal student aid, encourage your son or daughter to look into
private scholarships that are available from companies, nonprofits and
community groups. Your child’s high school counselor should be able to provide
more information on merit-based scholarships as well.
As long as you keep these five topics in mind and have a clear conversation with
your child before co-signing their private student loan, it should help to reduce
any future stress you may encounter. Many parents co-sign their child’s student
loans, but as long you strategize correctly, make on-time payments and consider
paying down the debt faster, both you and your child can reap the benefits of a
healthy credit score.
Remember, credit mix comprises 10 percent of your total credit score, because
the variety of account shows you can handle all sorts of credit. When done
correctly, adding a student loan account to your credit mix should have positive
Watch the latest video on the Keeping it Real with Credit channel where we
talk more about how co-signing a student loan can affect your credit score: