Doctors, lawyers, and engineers all have two common characteristics: proud parents and mountains of student debt. It’s an unfortunate fact that some of the most coveted and “successful” careers necessitate years of expensive schooling. But for many parents, the question of cost comes second to ensuring that their child has a clear path to success. They don’t hesitate to cosign private loans to defray college costs, because they want their student to have the best shot possible at the career of their dreams. After all, they reason, on a doctor’s or engineer’s salary, the student shouldn’t have any problem paying that money back.
Well-meaning or not, these parents might want to hold back before leaping onto their child’s debt as a cosigner. According to statistics provided by the CFPB, 90% of cosigners were denied after applying for release from their student’s debt obligations in 2015. This is the nightmare that many cosigning parents forget to consider, wrapped up in their dreams of student success: that they might be trapped in debt and left responsible for someone else’s financial obligation.
So, is cosigning a student loan worth it, all things considered? Let’s review the pros and cons.
PRO: Having a cosigner affords a young student better financial options.
In all likelihood, a teenager applying for college won’t have the rock-solid credit score, job history, or resources that private lenders prefer in their borrowers. Having a cosigner with those qualities vouch for a borrower reassures the lender, and provides loan options with better interest rates and payment plans. To parents concerned for their child’s future financial security, cosigning loans can be a quick way to ensure that they have manageable options.
CON: The cosigner might not be able to get out quickly if they want to.
Like it or not, the cosigner is along for the ride once students begin repaying the money they borrowed. Unfortunately, this means that the cosigner can be left in a difficult spot if the student is unable to afford their monthly payments. While some companies will release a cosigner after a student has established a track record of timely payments, a report from the Consumer Financial Protection Bureau revealed that 90% of the cosigner release applications filed in 2015 were rejected – leaving the cosigner tied to the flailing student. In the worst cases, a cosigner is left trapped in a negative financial bog for years as they attempt to secure a release from the student.
PRO: Cosigning a loan can add to the cosigner’s credit score.
The agreement between student, lender and cosigner is clear: the cosigner will vouch for the student and take on responsibility for their debt, but the student is the one responsible for actually paying the borrowed money back. However, because the student’s financial responsibility is linked to the cosigner’s reputation, the cosigner’s credit score benefits when the student pays their monthly obligations on time. For relatively little effort and at no monetary expense, a cosigner can enjoy a healthy addition to their credit score.
CON: A repayment plan gone wrong can ruin a relationship.
If that aspiring doctor, lawyer, or engineer is unable to find a well-paying job within the loan’s grace period, they may not be able to afford their monthly payments, and draw themselves and the cosigner into a sinkhole of debt. If the cosigner is unable to secure a release, they may be forced to decide between repaying the student’s loan themselves, or watching their credit score deteriorate under the weight of the debt. The stress of the situation can easily lead to hostility and resentment, and sour even the best of familial relationships.
All in all, deciding to cosign a loan is a decision that an individual has to make based on their own circumstances. Does the potential cosigner trust the student to make payments? Is there a significant chance that they won’t be able to earn enough to repay what they have borrowed? Questions like these need to be answered well before signatures are finalized; while parents might want to be a financial help to their child, they shouldn’t leap into action before considering the risk to their own financial health.