Why you shouldn't co-sign on a college loan

If you’re a parent considering co-signing on a student loan, avoid it at all costs. Or at the very least, educate yourself about what taking on this debt will mean to your financial future and retirement.

When it comes to co-signing for education loans, most American families are somewhat in the dark. While some sense it’s a bad idea, far too many have not walked through the details. 

The reason parents take additional loans out is that the allotment for their student’s loans gets maxed out by the sheer cost of attendance. 

The average yearly cost (tuition and fees only) for a four-year, in-state public school is $9,400, according to the College Board. Add roughly another $10,000 a year for housing, and you’re looking at at least $80,000 for a four-year degree. Even more if the student doesn’t graduate on time, which is a common occurrence. 

A private college could cost $160,000 to $200,000 for a four-year degree. Unless you’re receiving a generous financial aid package or a hefty tuition discount, most families finance their out-of-pocket cost of attendance with loans, which now total more than $1.3 trillion. Most families haven’t saved enough to cover these expenses. 

For those of you keeping score at home, the college debt total is the country’s second-highest consumer debt burden (behind only home mortgages).  

When it comes to parents “helping” by co-signing for loans, though, there’s a conflict between head and heart. Most know that they’re jeopardizing their finances, yet sincerely believe that, even by going into debt, their children will have a better economic future.

Of course, the rationale for college debt financing often outweighs bad personal finance decisions. Americans still highly value a four-year degree and are willing to ignore harm to their credit rating and being burdened by loan payments in retirement. Research shows that college graduates have much more earning power than those with just a high school diploma. 

But the emotional disconnect between future debt burdens and college financing today is troubling, according to a recent survey by LendEDU, a college refinancing site:

  • “57 percent of co-signers believe their credit score has been negatively impacted by co-signing on a student loan, [but] only 35 percent of parents regret acting as a co-signer.
  • Some 51 percent of co-signers believe co-signing put their retirement funds in jeopardy, but 33 percent of co-signers did not fully understand the risks of co-signing when they initially agreed. 
  • When children asked for help on loan repayments, 66 percent of co-signers said they had helped.” 

Of course, you can make more informed decisions when considering loans. Alex Coleman, vice president of LendEDU data analytics, suggested that family chats and understanding co-signing drawbacks will be helpful.

“Co-signing shouldn’t be done if the student is not making any income, or if they have no ability to handle their share of the costs,” Coleman advises. “In this scenario, a co-signer will find that they are fully responsible for repayment, and their credit score will be at the mercy of that repayment.”

He added that if a student leaves a co-signer in the dark about not being able to make a payment, “the co-signer’s credit score can take a hit without them even knowing. Additionally, if there is poor communication between the co-signer and student, then co-signing will simply not work. The co-signer needs to know at all times where the student stands in being able to handle their payments.”

Family communication is essential for making a good decision on loans. Talk about debt -- and what it will cost the entire family -- before signing up for loans.

What if you’ve already co-signed on a loan? “Co-signers do have the ability to get out of the agreement if they’re eligible for ‘co-signer release,’ or if the loans are refinanced,” Coleman noted. “Also, Parent PLUS loans make the parent the sole party responsible for repaying the loan. Their finances and credit score aren’t at the mercy of the student being able to make payments.”

Making the right decision also hinges on how much financial information parents are willing to disclose to their children. Our family was very honest in our desire to avoid college loans, mostly because we weren’t able to save enough to cover the full cost of our daughter’s education (most families are in this situation). We hated the idea of plunging our children -- and ourselves -- into debt, and we repeated that vow throughout high school. 

“Co-signing can be an effective tool if the co-signer and student are on the same page,” Coleman added. “If they are comfortable with discussing each others’ finances and their ability to make timely payments, then co-signing can work. Also, if the student has a steady stream of income and can handle their fair share, then co-igning can be effective.”  

Like any other college decisions, you need to examine the dollar-and-cents details. Do a cash-flow analysis of how you’ll pay for loans on a monthly basis. Discuss “worst-case” scenarios, such as a sudden loss of income or the death of a spouse or partner. Doing the numbers now will make it easier down the road, particularly when you’re within 15 years of retirement. 

  • John Wasik

    John Wasik is the author of The Debt-Free Degree and 15 other books. He writes and speaks regularly on personal finance issues throughout North America.