Co-signing a student loan may feel like a short-term favor, but for many people, it turns into a long-term financial risk. Higher education expert Mark Kantrowitz says more than 90 percent of private student loans require a co-signer, meaning two people are equally responsible for the debt.
“Private student loans often require a co-signer because the student borrower’s credit history is weak or non-existent,” Kantrowitz told CNBC (1). “They are unproven assets.”
This obligation does not disappear until the loan is repaid, and it does not matter who benefits from the loan.
Imagine that Jessica, 28, agreed to co-sign a private student loan with a friend when she was 22. At the time, she was just on her own and was trying to help someone she trusted. Her friend needed a co-signer to complete her degree and promise to make timely payments. She also told Jessica that she would refinance the loan as soon as possible. For years, everything seemed fine.
But Jessica recently learned the loan was months overdue and her friend had stopped making payments and responding to her messages. Lenders have begun calling Jessica directly to warn them that they will soon report late payments to the credit bureaus.
Taking over the loan could undo Jessica’s years of work to get out of credit card debt, but letting it go into default could damage her credit. What can she do to stay financially healthy?
Jessica’s situation illustrates the risks millions of Americans take, often without fully understanding the consequences. Private student loans are especially dangerous for co-signers because they lack many of the protections found in federal loans. There are typically no income-driven repayment plans and few forgiveness options. Even when co-signer release programs exist, they are rarely approved and often require approval from the primary borrower(2).
“Lenders are generally reluctant to remove co-signers,” Dean Kaplan, president of The Kaplan Group, told U.S. News.
“If they release a cosigner and the borrower defaults, the lender faces a greater financial loss than if they had not released the cosigner(2).”
The consequences can be serious. An AARP survey found that nearly half of borrowers age 50 and older who co-signed for a private student loan ended up paying it off themselves(3). In some cases, co-signers face aggressive collection agencies, lawsuits, wage garnishments, frozen bank accounts, or property liens for debts they do not personally use but are still responsible for.
Breach of contract is not always caused by irresponsibility. Illness, disability, job loss, or a family emergency can cause even well-intentioned borrowers to struggle. When this happens, their co-signer becomes responsible for the debt.
In one case reported by CNBC, a private lender waived a 53-year-old woman’s payments after she became disabled, but then transferred the entire balance to her elderly mother, who had co-signed an agreement with her years ago to live off her limited Social Security benefits (1). The daughter is now worried that the loan company will take away her mother’s house.
Once a loan becomes delinquent, the co-signer has few options. You either have to repay the debt or suffer credit losses. 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, litigation has its own costs.
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Scenarios like this highlight why cosigning is more about risk assessment than generosity. Generally speaking, most financial experts warn against co-signing. Keep in mind that student loan repayments often take decades, and a lot can change during that time. If you are considering co-signing any type of loan, consider the following factors:
Before co-signing, it’s worth considering whether you can easily afford the loan on your own. Do not co-sign if you cannot or it would create an undue hardship.
Some co-signers believe they will receive alerts if borrowers become delinquent. This is not always guaranteed. Setting expectations with other borrowers, such as providing late payment notices or sharing access to loan accounts, can reduce unpleasant surprises.
Trust alone is not enough. Understanding a borrower’s income stability, job prospects and overall financial situation can help you assess the true risk. If they don’t feel comfortable with transparency, don’t sign.
Many borrowers commit to refinancing and subsequently remove co-signers. In practice, refinancing requires strong credit and stable income, which is not always possible. Additionally, lenders often have a lot of wiggle room when deciding whether to offer a refinance.
The point here is simple: Co-signing means tying your financial future to someone else’s ability and willingness to repay their debt. And it’s not always about trust, as the borrower’s disability or death could put you in a difficult situation. Avoid co-signing a loan unless you are willing to pay off the debt yourself.
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CNBC(1); U.S. News(2); AARP(3)
This article provides information only and should not be considered advice. It is provided without any warranty of any kind.
