Co-signing a student loan can be a short-term boon, but for many people it becomes a long-term financial risk. According to higher education expert Mark Kantrowitz, more than 90 percent of private student loans require a cosigner, meaning two people are equally responsible for the debt.
“A co-signer is often required on a private student loan because the student borrower has a thin or non-existent credit history,” Kantrowitz told CNBC (1). “I’m an unproven asset.”
This obligation does not disappear until the loan is repaid, and it does not matter who benefited from the loan.
Imagine Jessica, a 28-year-old who agreed to co-sign her friend’s private student loans when she was 22. At the time, she was newly single and trying to help someone she trusted. Her friend needed a co-signer to finish her degree and promised to stay on top of the payments. He also told Jessica that he would refinance the loan as soon as he could. For years, everything seemed fine.
But Jessica recently learned that the loan was several months past due and that her friend had stopped making payments — and stopped responding to her texts. The lender began calling Jessica directly, warning that they would soon report the late payments to the credit bureaus.
Taking over the loan payments could undo the years of work Jessica put in to get rid of her credit card debt, but leaving it unpaid could damage her credit. What can she do to stay financially healthy?
Jessica’s situation illustrates a risk that millions of Americans take, often without fully understanding the consequences. Private student loans are especially risky for cosigners because they lack many of the protections included in federal loans. There are usually no income-based repayment plans and few forgiveness options. Even when cosigner release programs exist, they are rarely granted and generally require the approval of the principal borrower (2).
“In general, lenders are averse to dropping a cosigner,” Dean Kaplan, president of The Kaplan Group, told US News.
“If they have released the cosigner and then the borrower defaults, the lender faces a greater financial loss than if they had not released the cosigner (2).”
Precipitation can be severe. An AARP survey found that nearly half of borrowers age 50 and older who cosigned a private student loan eventually made payments themselves (3). In some cases, co-signers have faced aggressive collection agencies, lawsuits, wage garnishments, frozen bank accounts, or liens on property from debts they didn’t personally use but are still responsible for.
And by implication it is not always caused by irresponsibility. Illness, disability, job loss, or family emergencies can cause even well-intentioned borrowers to fall behind. When this happens, their co-signers become liable for the debt.
In one case reported by CNBC, a private lender excused a 53-year-old woman from repayment when she became disabled, but then transferred the entire balance to her elderly mother, who co-signed years earlier and lived off her limited Social Security payments (1). The daughter is now worried that the loan company will take her mother’s house.
Once a loan becomes delinquent, cosigners have few options. You either have to pay off the debt or take a hit on your credit. Depending on your state and the terms of the loan, you may be able to pay off the debt and then sue the original borrower in civil court. However, a lawsuit comes with its own costs.
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Scenarios like this highlight why co-signing is less about generosity and more about risk assessment. In general, most financial experts caution against co-signing. Remember that student loan repayment often takes decades, and a lot can change during that time. If you’re considering co-signing for any type of loan, consider these factors:
Before you co-sign, it’s worth considering whether you can comfortably afford the loan. If you can’t or it would cause undue hardship, don’t co-sign.
Some cosigners assume they will be alerted if a borrower falls behind. That is not always guaranteed. Setting expectations with the other borrower, such as late payment notification or shared access to the loan account, can reduce unpleasant surprises.
Trust alone is not enough. Understanding the borrower’s income stability, job prospects, and overall financial situation can help you assess real risk. If they are uncomfortable being transparent, don’t sign.
Many borrowers promise to refinance and remove a cosigner later. In practice, refinancing requires strong credit and stable income, which is not always possible. Also, lenders often have wide latitude in deciding whether to offer a refinance.
The appreciation here is simple: co-signing means tying your financial future to someone else’s ability and willingness to repay the debt. And it’s not always about trust, as a borrower’s disability or death could leave you on the hook. Avoid co-signing for loans unless you are comfortable paying off the debt yourself.
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CNBC (1); US News (2); AARP (3)
This article provides information only and should not be construed as advice. Offered without warranty of any kind.
