5 Conversations to Have Before Cosigning a Refinanced Student Loan

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Even though you want the best for your child, cosigning a refinanced student loan isn’t a decision to be made lightly. After all, cosigning debt means you become just as responsible for the loan as they are, and your credit is on the line if they can’t pay.

So before agreeing to cosign a student loan refinancing application for your child or other loved one, make sure to discuss some important issues first. By answering these five questions, you can ensure you and your child are on the same page before anyone signs on the dotted line.

1. Do you need a cosigner to refinance student loans?

The majority of borrowers refinance student loans after they’ve graduated college and have spent some time in the workforce. So your child might already have strong enough credit and income to refinance student loans on their own.

Before signing on to their application, find out if your child can qualify for student loan refinancing without your help. Even if their rates are slightly higher, this increase might not cost them much money overall.

Use a student loan refinancing calculator to compare terms between a loan with and without a cosigner. If the difference in savings is minimal, it might not be worth bringing your name (and your credit) into the equation.

And if they’re not able to qualify solo yet, discuss whether they can take steps to improve their credit and meet other qualifications. If the student can pay down debt, dispute credit-reporting errors or take any other steps to improve their credit fast, then doing so might be preferable to you cosigning the loan.

2. Who will be responsible for repayment?

If adding your name as a cosigner means significant savings for the primary borrower, you might be tempted to help out. But before agreeing to cosign, make sure to have a discussion about who’s responsible for repayment.

Go over the terms and conditions of the loan, including when repayment starts and how much the monthly payments will be. Discuss the advantage of setting up autopay so the primary borrower never misses a payment.

“Make sure the student understands that if he or she foresees the possibility of missing an on-time payment, he or she must absolutely let the parent know,” advised Todd Christensen, accredited financial counselor at MoneyFit.org. “Otherwise, late payments will also negatively affect the parent’s credit rating.”

Although you probably want to give your child the benefit of the doubt, it’s worth explicitly talking about who’s responsible for paying back the refinanced student loan from month to month.

3. Is refinancing the right choice for you?

Although refinancing student loans can lead to a better interest rate and major savings, it’s not the right choice for everyone. If you refinance federal student loans, you turn them private.

As a result, you lose the benefits associated with federal student loans, such as income-driven repayment plans and eligibility for Public Service Loan Forgiveness. While some private lenders offer perks like forbearance and deferment, this varies from lender to lender.

And many aren’t so flexible in the event a borrower loses their income or goes back to school. As a cosigner, you want to make sure your child keeps up with payments and knows that they’ll no longer be able to rely on federal protections.

So make sure your child has thought through the pros and cons of refinancing before submitting their application.

4. What’s the plan if you’re struggling to make payments?

Cosigning can be risky if your child can’t afford to pay back their loan. As a cosigner, you’re as responsible for the debt as they are. If the loan goes delinquent, debt collectors could start calling you for payment, and your credit could be destroyed if your child misses payments.

“I am very rarely a fan of a parent or grandparent cosigning a loan for anything, let alone a student loan,” said Christensen. “I have counseled too many parents and grandparents going through bankruptcy because their family member stopped making payments on a cosigned loan and, nine months later, the parent [or] grandparent gets hit with the entire bill, plus penalty fees.”

Although this is the worst-case scenario, it can happen, so make sure your child is aware of the consequences of falling behind on student loan payments. If they don’t seem to understand the seriousness of this situation, or if they expect you to step in and pay when that’s not your intention, think twice before cosigning.

5. Does your lender offer cosigner release?

Some refinancing providers, such as CommonBond, offer cosigner release after a certain period of missed payments. With this perk, your name could be removed from the refinanced student loan entirely after a year or two of on-time payments.

Thanks to cosigner release, you could help your child get a good rate on a refinanced student loan without having to share the debt forever. If this benefit is important to you, consider asking your son or daughter to look for a refinancing provider that offers cosigner release.

Talk everything out before sharing debt

Cosigning a refinanced student loan is a big deal, and it’s important to clarify expectations before agreeing to this request. If you’re concerned your child isn’t taking debt repayment seriously, cosigning might not be the right move.

Delinquent debt could damage your credit, not to mention strain your relationship. Plus, adding debt to your credit report could make it more difficult for you to qualify for a mortgage or line of credit, since cosigning will increase your debt-to-income ratio.

If you’re not worried, though, cosigning the loan could help your child save money on interest. Just make sure to keep the lines of communication open, so everyone involved remains updated on the progress being made toward repaying this debt.

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