6 Totally Normal Fears About Cosigning a Student Loan

 September 6, 2019
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Cosigning a Student Loan

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If your child is exploring private student loans to pay for college, you may have already discovered how hard it is for them to qualify on their own. They may need a student loan cosigner — requirements for credit and income can be very strict, especially if you want a loan with competitive rates.

As a parent, grandparent or another adult in the student’s life, you might be willing to fulfill the student loan cosigner requirement so they have the funds they need for college. But cosigning is a big responsibility, and it’s perfectly normal to worry about what cosigning means.

Here are six reasonable concerns about cosigning a student loan for your child, and how to address them before signing your name on the dotted line.

1. You could end up responsible for paying it back
2. You might not find out about missed payments until it’s too late
3. Your credit could get hurt in the process
4. You could have trouble qualifying for other types of loans
5. You might not ever get released from the loan
6. Your relationship with your child could become strained
Bottom line: Discuss your concerns before agreeing to cosign

1. You could end up responsible for paying it back

When you cosign a student loan, you’re not merely adding your name in support of the primary borrower. Really, you’re pledging to be equally responsible for paying the loan back in full and on time.

“Parents need to understand that cosigning a loan is the same as if they borrowed the loan,” said Mark Kantrowitz, the publisher of SavingforCollege.com. “You are not just enabling them to get a loan or to get a lower interest rate. For all intents and purposes, you are borrowing the loan. A cosigner is a co-borrower, equally obligated to repay the debt.”

Before cosigning, speak with your student about expectations around repayment. Make sure to consider any risks associated with taking out this money.

“When deciding to cosign a loan, you should evaluate the risk that you will have to repay the debt,” Kantrowitz said. “How much is being borrowed? How likely is the student to graduate? How likely are they to get a good job after graduation?”

Along with discussing these questions with your child, use a student loan calculator so you both have a clear sense of what repayment will look like. Make sure you’re both on the same page about repayment before borrowing any money together.

2. You might not find out about missed payments until it’s too late

Even though you’re an equal co-borrower of the loan, notification about the loan’s status isn’t necessarily one of your student loan cosigner rights. If your child misses payments, you might not find out until it’s too late.

“The lender is under no obligation to alert the co-signer if the primary borrower falls behind,” said Michael Minter, managing partner of financial advisory firm Mintco Financial. “The first indication will probably be a drop in their credit score.”

Even if your child is responsible about paying back their loan, they could accidentally fall behind due to missing a communication from their lender or not realizing their loan was sold to a new servicer.

Make sure your child provides their servicer with updated contact information so they don’t miss any important news. Also encourage them to sign up for autopay and to check on their online accounts from time to time so they know they’re current on their payments.

3. Your credit could get hurt in the process

Since cosigning a loan is essentially the same as borrowing a loan, your credit will be on the line in the event of missed payments, delinquency or default. Late payments drag down a credit score, and a defaulted loan could significantly damage your credit.

“The cosigned loan will show up on your credit report as though it were your loan, because it is your loan,” said Kantrowitz. “If the student is late with a payment or defaults on the loan, it will ruin your credit, not just the student’s.”

Again, make sure the student understands when their payments are due and can afford them.

4. You could have trouble qualifying for other types of loans

Since your cosigned loan will show up on your credit report, it will impact your debt-to-income ratio. As a result, it could hurt your chances of qualifying for other types of loans, such as a personal loan or mortgage. At the very least, it could mean you end up with a less competitive interest rate.

“Your borrowing ability could be affected,” said Logan Allec, a certified public accountant and owner of personal finance site Money Done Right. “Since any student loans you co-sign on appear on your credit report, the loan will be factored into your personal debt-to-income ratio if you apply for a loan yourself.”

So before cosigning, think about your financial goals in the years to come.

“Consider whether you anticipate needing to borrow money over the life of the loan,” advised Allec. “Determine whether or not the student loan amount would be enough to skew your debt-to-income ratio drastically, and factor that into your decision.”

If cosigning the loan will have a significant negative impact on your own ability to borrow, it might not be the right move.

5. You might not ever get released from the loan

Several private lenders advertise a student loan cosigner release benefit, which removes your name from the loan after a certain period of on-time repayment. Sallie Mae, for example, lets your student apply for cosigner release after 12 months of on-time payments, while College Ave Student Loans lets them apply after 24 months.

But according to the Consumer Financial Protection Bureau, 9 out of 10 applications for cosigner release get rejected. There are quite a few requirements a student must meet to qualify, and lenders appear to be very strict about who can actually get cosigner release.

So while you might be able to get your name removed from the loan a year or two after repayment starts, there’s no guarantee this debt won’t show up on your credit report for the entire life of the loan.

6. Your relationship with your child could become strained

Sharing debt is an undertaking that shouldn’t be taken lightly. Even if your child has every intention of repaying the loan, they might run into financial hardship or struggle to find a job after graduation. For some people, this can lead to challenges in the relationship they have with their child.

“Student loans are usually for large amounts of money, and a cosigner will be required to repay it if the borrower does not — this can put a serious strain on your relationship,” said Allec. “Have an honest conversation with your child before agreeing to cosign about your expectations and concerns, and work up an agreement on paper together that you can point to if needed.”

By having these important conversations before you borrow, hopefully you can prevent any conflicts or misunderstandings before they occur.

Discuss your concerns before agreeing to cosigning a student loan

All of these concerns about cosigning debt are valid, as your credit, finances and even your parent-child relationship could be at risk. Make sure to discuss the pros and cons of cosigning a student loan so your child understands the gravity of the situation.

As Allec suggested, you might even come up with a written agreement around student loan cosigner requirements and expectations which you can both refer back to in future years.

Since student loan cosigner release doesn’t always work out, it’s also worth exploring refinancing student loans in your child’s name. If your child has the credit and income to qualify on their own, they can refinance the loan by themselves, thereby relieving you of responsibility for the debt.

By exploring your options together, you can alleviate your concerns and make an informed decision about whether cosigning a private student loan is the right choice for you and your family.

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