Refinancing your student loans is a great way to lower your interest rate, monthly payment, or both. But for many people, it requires that someone cosign the loan. As a parent, you’d do just about anything to help your kids. But before you cosign your child’s student loan refinancing, consider how it can affect your financial well-being.
3 Pros of cosigning your child’s student loan refinancing
“The biggest reason for cosigning is to help people get approved for a loan they don’t qualify for on their own,” says Devin Hughes, director of business development at LendKey, “or to achieve a lower rate if the cosigner has a better credit score or financial history.”
1. You can help your child financially
Getting a lower interest rate on a loan can save hundreds or even thousands of dollars, depending on the balance and loan terms. If your child is responsible, adding your credit history and financial strength to the application can help him or her get ahead on repaying the debt.
2. You can be an accountability partner
Since you’re on the loan with your child, it gives you an incentive to help him or her repay the debt as quickly as possible. Review some ways to pay off student loans early and help your child work toward that goal.
3. You can help boost your child’s credit
If you choose to cosign, you have a big incentive to help your child stay on top of his or her payments every month. And since payment history is the most important factor in your credit score, your encouragement can help keep your child on the right path to building credit.
Questions to ask before cosigning
Before you cosign a loan, there are some questions you should ask yourself and your child.
1. Is there a cosigner release option?
Many student loan refinancing lenders offer what’s called a cosigner release. This means that, after a predetermined amount of time, the primary borrower can request that the lender remove the cosigner from the loan.
“This gives a higher likelihood that the cosigner can absolve themselves from the debt,” says Hughes, “although not guaranteed.”
When the borrower requests a cosigner release, the lender will typically run another credit check on the primary borrower and request income documents to verify that he or she is qualified to continue the loan on their own. Cosigner releases help mitigate a lot of the risks that come with cosigning, so it’s essential that you know if it’s available before proceeding.
Among the top student loan refinancing lenders, here are the ones that offer cosigner release:
- Citizens Bank: After 36 months of consecutive on-time payments
- CommonBond: After 24 months of consecutive on-time payments
- LendKey: After 12 months of consecutive on-time payments
- Sallie Mae: After 12 months of consecutive on-time payments
Sidenote: you can use LendKey’s student loan refinancing calculator to compare your current loan with a potential loan to see how much you’ll save with a refinance.
The biggest concern as a cosigner is your responsibility if the borrower can’t make payments”
2. What are the terms of the loan?
“The biggest concern as a cosigner is your responsibility if the borrower can’t make payments,” says Hughes. As a cosigner, you’re equally liable for the debt. So, if the borrower falls behind, it could hurt your credit score, and you’d be on the hook financially.
“If the balance is large, you should also keep in mind that the amount will impact your debt-to-income ratio,” adds Hughes. This is especially important to remember if you’re planning to apply for other kinds of credit in the near future.
Start by asking how much debt your child is refinancing. Make sure you understand the length of the repayment period and the monthly payments. If the worst-case scenario happens and your child stops making payments, you’ll want to know whether you can afford the aftermath.
3. Can your child afford it?
When refinancing student loans, you usually consolidate several loans into one. This makes it easier to keep track of things because there’s only one payment to make instead of multiple.
As a cosigner, you’ll want to make sure your child can make that payment every month. Ask for payment records on his or her current loans to make sure they’re current. Check to see if there have been any late payments or requests for deferment or forbearance.
The last thing you want is to be on the hook financially for the loan, so do your due diligence to make sure you never have to be.
4. How might this affect your relationship?
If your child asks you to cosign his or her student loan refinancing, declining may have a negative impact on your relationship. After all, your child knows that he or she could get a better interest rate or payment if you help.
But that negative impact pales in comparison to the one that can result from your child defaulting on the loan down the road and you needing to pick up the tab.
Ask yourself if you trust your child to make the payments on his or her own. If you don’t have any reservations, cosigning the loan can be good for your relationship. But if you don’t feel comfortable, know that a short-term fallout can prevent long-term damage.
If you choose to cosign
If you decide to cosign your child’s student loan refinancing, help him or her choose the right lender. Compare the best lenders and their terms to make sure you and your child are getting the best deal. Choose a lender that offers a cosigner release.
Once the loan has been approved, you likely won’t receive any information about monthly payments. Don’t let that make you complacent. Be involved in the repayment process, at least to ensure your child isn’t missing any payments.
Also, keep track of the cosigner release process. You’ll want to be removed from the loan as quickly as possible, both to help your child get off the training wheels and to protect yourself over the long run.