With summer slowly coming to an end and the back-to-school rush beginning, families across the country are looking at college supply lists, tuition payment deadlines, and the big question of “how on earth are we going to pay for college?!” For many, this means turning to student loans, and in a lot of cases, this also means asking a parent or legal guardian to co-sign.
In honor of National Financial Awareness Day on August 14th, SmartSpending focuses on financial tracking, goal-setting, and thoughtful planning this month. Or, in short, being financially aware. And honestly, few financial decisions deserve as much reflection as taking out a student loan. Why? Because both the short- and long-term consequences of taking out a student loan can be huge. Whether you’re a student, a parent, or both, understanding the details is key to making informed, confident decisions.
That’s why today, we are going over the details of student loans and co-signing. Expect to get the answer to questions like: What exactly are student loans? What does co-signing mean? And what should I know about the short- and long-term implications of borrowing for college? Ready? Then let’s dive straight in.
What are student loans, really?
First of all, student loans are a type of financial aid specifically designed to help students cover the cost of higher education. But you probably knew that already, right? Costs that can be covered by a student loan include things like tuition, fees, housing, books, and sometimes even personal expenses.
There are two main types of student loans:
- First, there are federal student loans, which are funded by the government. Federal student loans often offer benefits like fixed interest rates, income-driven repayment options, deferment, and forgiveness programs. They don’t require a credit check or co-signer for most undergraduate borrowers, but are capped at a certain amount.
- And secondly, there are private student loans, that are generally offered by banks, credit unions, and online lenders. Private loans are often used to fill the gap when federal aid doesn’t cover everything. These loans typically require a credit check and, in most cases, a co-signer, which is where parents or legal guardians often come in. Private student loans are, in theory, uncapped.
What does co-signing actually mean?
We just used the term co-signer, but what does this mean? When a parent or another adult co-signs a student loan, they’re agreeing to share full responsibility for that loan. In other words, if the student can’t make payments, either right now or in the future, the co-signer is legally obligated to step in.
Although it’s easy to scribble on the bottom of a piece of paper, it’s important to understand that co-signing is not just a signature. It’s a binding financial commitment that shows up on the co-signer’s credit report, affects their debt-to-income ratio, and could impact their ability to borrow for other things, like a mortgage or car loan. Or, in other words, co-signing on a student loan has serious short- and long-term consequences for the co-signer.
Short-term impacts of student loans and co-signing
Now, let’s go over these consequences of taking out student loans and co-signing, focusing especially on the potential repercussions for a co-signer. First, we’ll go over the immediate impacts, after which we’ll move on to the long-term consequences.
1. Immediate appearance on credit report
First, the most prominent impact of all: the moment a co-signer signs that loan, it will appear on both the students’ and the co-signer’s credit reports. This can either help or hurt, of course, depending on how the loan is managed. On-time payments can strengthen both the student’s and the co-signer’s credit, while late or missed payments can damage it.
2. Shared responsibility and risk
Secondly, a student loan will result in a shared financial responsibility, shared between the student and the co-signer. That means that if the student leaves school early, loses income, or simply isn’t able to start repayment right away, the co-signer becomes responsible for the full loan.
3. Financial pressure right after graduation
And lastly, for students, repayment usually begins six months after leaving school. Though, depending on the loan type and interest terms, interest may begin accruing immediately, which means the total balance owed can grow even before that first payment is due. That means that right after graduation, the financial pressure starts to mount, for both the student and the co-signer.
The long-term implications of student loans and co-signing
1. Monthly payments that stick around
As we just said, the financial pressure starts to mount right after graduation. But, this pressure will probably stick around for quite some time… On average, monthly payments kick in within six months of graduation and stay for the next 10 to 25 years, depending on the loan and repayment plan. These payments can feel overwhelming, especially for recent grads still finding their financial footing or starting out in lower-paying roles.
For co-signers, even if the student is handling payments well, the loan is still part of their financial picture. That means any late payments or defaults will hurt their credit too, and if the student struggles, the co-signer is fully responsible for picking up the slack.
2. Long-term credit impact for both
Secondly, student loans show up on both the student’s and co-signer’s credit reports, and they stay there until the loan is paid off. For students, this can be an opportunity to build a solid credit history if payments are made on time. For co-signers, though, it’s a bit more complicated. The loan becomes part of their overall debt picture, which can make it harder to qualify for new credit or access better interest rates, even if they’re not the ones making payments.
Missed or late payments damage both credit scores, which is why it’s critical to stay on top of due dates and communicate regularly about repayment.
3. Difficulty releasing the co-signer
And last but not least, many families assume the co-signer can be removed once the student graduates or makes a few payments, but in reality, co-signer release isn’t automatic or even guaranteed. Most private lenders require a formal application, several years of on-time payments, and proof that the student can handle the loan on their own, which is usually based on income and their credit score. And, to be frank, even then, approval to be released as a co-signer isn’t certain.
That means a co-signer could be tied to the loan for its full term, even if their original plan was to exit early. This can lead to financial strain or unexpected limitations on their borrowing power, well beyond the college years.
What to consider before co-signing
Before stepping into a co-signer role or asking your parents or legal guardian to take it on, take time to reflect on a few key questions. Pondering these questions could help you make a thoughtful decision about whether or not to take out or co-sign student loans.
- Does the student understand the full cost of borrowing, including interest?
- Is there a clear plan for repayment after graduation?
- How stable is the student’s chosen career path in terms of income?
- Am I, as a co-signer, financially secure enough to cover payments if needed?
- Are there other options, like grants, scholarships, or part-time work, that could reduce the total amount borrowed?
How to stay on track with student loans
Once a loan is in place, whether federal or private, the best way to stay ahead is to be proactive. You don’t want to be surprised when it comes to your finances, right? Therefore, let us give you some tips for both students and co-signers, on how to stay on track with student loans.
- Track payments together: Set calendar reminders, or use an app to keep tabs on due dates.
- Start payments as early as possible: Even small contributions while still in school can reduce overall interest and long-term debt.
- Monitor credit reports: Both students and co-signers should check their credit reports periodically to ensure payments are being reported accurately.
- And lastly, have regular check-ins: Monthly chats about the loan status can help prevent surprises and keep communication open.
Move forward financially empowered
Student loans can be a valuable resource, but they’re also a serious financial commitment. With everything we’ve told you today, we hope to have helped you understand this commitment even better, as well as empowered you to make a thoughtful decision on whether or not to take out or co-sign on a student loan.
As we transition from summer into fall and focus on being financially aware, now is the perfect time to make financial plans, reflect on current student loan commitments, and have open conversations. Whether you’re preparing for your child going to college for the first time ahead, or reassessing your current student loan situation, taking the time to understand your options today sets everyone up for more informed, confident decisions tomorrow.
The key is not to fear student debt, but to face it with clarity, preparation, and honest communication. With the right mindset and a solid plan, both students and parents can move forward financially empowered and be better equipped for whatever comes next!
