Co-Signing a Student Loan or Line of Credit: What Parents Risk in Canada

When a parent co-signs a student line of credit, the parent becomes equally responsible for the entire unpaid balance, not just a share, according to the Financial Consumer Agency of Canada (FCAC). If your child stops paying, the lender can look to you for all of it. Before signing, make sure your child has applied for government student aid, which carries no interest on the federal portion and offers the Repayment Assistance Plan, so the bank credit covers only the gap. Ask for the lowest limit that does the job, insist on receiving statements, which is your right as a joint borrower at a federally regulated lender, and write down how the family will handle payments. Only co-sign an amount you could repay yourself.

What co-signing means

FCAC defines a joint borrower as someone who signs a mortgage, loan, credit card or line of credit agreement with one or more other people, also known as co-signing. Each joint borrower is equally responsible for repaying the unpaid balance. On its student line of credit page, FCAC notes that a student may need someone, such as a parent, to co-sign, and that this person will also be responsible for the debt if the student cannot pay it back. Some lenders do not require a co-signer for every student: TD, for example, says co-signer requirements for its Student Line of Credit depend on credit history and are assessed case by case.

Your rights as a joint borrower

These rights apply when you deal with a federally regulated institution such as a bank or federal credit union. Keep receiving statements. The worst surprise for a co-signer is learning months later that interest payments stopped.

The risks, plainly

• You can be asked to pay the full balance if your child does not.
• A line of credit requires at least interest payments while the student is in school, so missed payments can start early.
• The debt may affect your own borrowing room, since lenders consider obligations you have taken on; ask your lender how a co-signed account would be treated in your own applications.
• A line of credit has no Repayment Assistance Plan, unlike government student loans.
• Family strain: unclear expectations about who pays can cause conflict, which is why rules in writing help.

How to limit the risk

1. Make sure your child applies for government aid every year, so bank credit covers only what is left.
2. Ask for the lowest limit that covers one year, and review it each year.
3. Set up automatic interest payments from your child's account, and know when they are due.
4. Decline optional credit insurance unless you have read it and want it; FCAC says lenders cannot require it.
5. Write a simple family agreement: who pays interest during school, what happens if your child leaves the program, and when repayment starts.
6. Ask the lender whether a co-signer can be released later, and what it would require.

Alternatives to co-signing

• Gifting a fixed amount each year instead of guaranteeing open-ended credit; see the related guide on gifts and loans to adult children.
• Using RESP withdrawals, if you have an RESP.
• Helping your child budget so the gap is smaller: residence versus home, meal plans and textbooks.
• Encouraging a bank that does not require a co-signer for your child's profile, if one is available.
• Transferring your child's unused tuition amount to you on your tax return, up to the federal limit, to reduce family tax.

Example with made-up inputs

These numbers are an example with made-up inputs. Maria co-signs her son's $15,000 student line of credit at a made-up 7%. He draws $5,000 a year for three years and pays interest during school. In his fourth year he leaves the program and stops paying. The balance is $15,000, and interest at 7% adds about $1,050 a year. If Maria takes over and repays over five years, her payments are about $297 a month, or about $17,820 in total. Had she co-signed for a $5,000 limit and gifted $10,000 instead, her total cost would have been the $10,000 gift plus up to about $5,940 if she had to repay the smaller line, or about $15,940, with a known ceiling from the start.

If payments stop

If your child misses a payment, act quickly. Call your child first to find out why: a delayed paycheque is different from leaving school. Then call the lender to ask what is owed, whether the account is past due, and what options exist, such as temporarily paying interest only. Paying the missed interest yourself while you sort things out keeps the account current. If your child has left school, ask when the interest-only period ends and principal payments begin, so you can plan. Finally, revisit the family agreement: decide whether your child will repay you, on what schedule, and whether that arrangement should be written down as a loan between you.

Before you sign: a short checklist

• Your child has applied for government student aid this year.
• You know the exact limit, rate and how the rate can change.
• You know when principal payments start.
• You will receive statements directly.
• You could repay the full limit yourself if needed.
• You and your child have agreed in writing on who pays what.

Questions to ask the lender

• Is a co-signer required for my child, or only recommended?
• What is the interest rate, and how is it set?
• When do principal payments start after my child leaves school?
• Can I receive statements and alerts directly?
• Can the co-signer be removed later, and how?
• What happens if my child leaves the program before finishing?

Related: line of credit versus student loan and paying for an adult child's university.