Student loan debt in the United States has climbed to more than $1.48 trillion, a record amount. The average student loan debt for the class of 2017 was nearly $40,000, according to Student Loan Hero, an online resource for managing student and personal debt. This represents a huge financial burden for 44.2 million Americans and can take years to pay off.
Currently, interest rates on private student loans range from about 3 percent to about 12 percent, depending on the type of loan and the lender. Interest rates on federal loans increased this year and are between 5.05 percent and 7.6 percent for the 2018-19 school year, according to the office of Federal Student Aid. The top picks for student loan refinancing from Student Loan Hero offer interest rates between 2 percent and 9 percent.
For some, refinancing a student loan with a lower interest rate can be a great way to save money and finish paying off debt faster. Those who are steadily employed, usually in professional careers, are able to apply and be approved on their own. For others, most refinancing lenders will allow co-signers to help applicants.
“Generally, refinancing your student loans is just the first step on the journey out of student debt,” said Anna Khayet, director of product marketing, student loans at SoFi, an online personal finance company.
For people who are looking to refinance, having a co-signer makes approval easier and may mean they are offered a lower interest rate. For those asked to co-sign, there is more to consider.
If someone has asked you to co-sign a student loan with them, here are a few things to think about.
They piggyback on your good credit
“I recommend finding a co-signer who has good credit and good income to maximize your chances of getting a low rate,” said Khayet from SoFi.
Even a quarter of a percentage point could have a significant impact on much you ultimately pay. The faster you pay off your loans, the sooner you can move on to your next goal, Khayet said.
With the co-signer’s financial information on an application, lenders will look at the student as “less credit risky,” said Zack Friedman, founder and CEO of Make Lemonade, a free personal finance comparison site.
“Whenever we’re in an environment when rates are starting to rise, it can make sense to refinance,” said Miranda Marquit, financial expert and senior writer at Student Loan Hero. “You never know what’s going to happen with the economy but if you can get a lower rate now, you have a lower rate.”
While helping a child or other relative get a lower rate may feel great, it’s important to remember that you’re offering up your financial information to help them. There is no added risk for the person bringing you on as a co-signer, but there could be consequences for you.
You are responsible if they don’t pay
As a co-signer, you’re accepting joint responsibility for the loans if the student does not pay on time or the full amount.
Co-signers “are pretty much putting it on the line,” said Marquit from Student Loan Hero. “You have to think hard – be really honest with yourself about if you can trust them to make these payments.”
It will affect your credit
“When you co-sign on somebody’s loan that shows up as credit you’re using,” Marquit said. That can impact your ability to get credit later, even if you’re not the borrower, she said.
This can have other effects on your overall financial health. Marquit said that co-signers should assess the burden of the loan against their other financial goals. Are you approaching retirement? Do you have other younger children going to college? Depending on what else is going on in your life, it might not be feasible to co-sign.