My 34-year-old daughter wants to go back to school and become a teacher — but she’s broke and needs me to cosign on a private student loan. What are the risks?

What happens when you cosign a student loan?

There are a few risks of cosigning a student loan that could hurt you financially. When you cosign a student loan, you effectively agree to repay that loan if the original borrower is unable to make payments. That means if the original borrower — in this case, your child — doesn't pay, the lender can go after you.

It also means if your kid falls behind on their payments, they won't just damage their own credit score — they could take yours down in the process too. And if that happens, any loan you take out for the next seven years (how long late payments can stay on your credit report) could be harder to qualify for and more expensive.

The amount of the loan will also be added to your existing debt when it comes to calculating your debt-to-income ratio. If that pushes your DTI beyond 35%, that can also make it harder to qualify for loans of your own, such as a mortgage refinance.

Essentially, as a cosigner, you need to be prepared to shoulder your adult student’s monthly payments or face some serious financial consequences. And that may mean having to put your own financial plans or goals on hold.

Not all parents are prepared for these possibilities. A 2017 survey from LendEDU found that about 33% of private student loan cosigners did not fully understand the risks involved.

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How to protect yourself if you’re being asked to cosign a student loan

Since co-signing a student loan carries risk, you may want to see if it's possible for your child to borrow money without your help. The problem with private loans is that lenders require a certain credit score to qualify. If your child is short on funds with poor credit, they may not be able to get a private loan on their own.

Most federal student loans, however, do not require a credit check. And for this reason, they don't require a co-signer. So have your child see if that's an option before agreeing to cosign. Federal student loans also offer a number of protections that private student loans don't, like income-based repayment plans and forbearance or deferment when financial circumstances warrant it.

Assuming that's not an option, set clear expectations with your child before cosigning their private loan. Write out an agreement between the two of you that documents who's going to be making payments and when.

Additionally, before you put your name on your child’s student loan, make sure your finances are as in good shape as you think they are. If you end up having to make payments on that loan, it could, for example, limit your ability to save for retirement for a period of time. So make sure you’ve got a decent-sized nest egg already. LendEDU's survey found that about 51% of cosigners felt that their child's debt was putting their retirement in jeopardy.

Finally, do an honest assessment of your child as a borrower. If they’re notoriously bad with money, you’re taking an even bigger risk. And you don’t want your cosigner role to impact your relationship. So if you feel you need to say no, do it.

Your child could always work a few more years and take steps to boost their credit to qualify for a loan on their own. And in that situation, if they start struggling to repay it, you’ll be able to choose to help them out, as opposed to being legally obligated to do so.