You should only co-sign a student loan if you can afford to repay it yourself as you may have to.
By co-signing, you are legally obliged to repay the loan if the main borrower cannot. And if you can’t afford to make payments, it will damage your credit score.
If you can afford to co-subscribe, you should understand the risks involved and how to get the credit out of your hands in the future.
Options to consider before jointly signing
Before applying for a private student loan as a co-signer, direct the main borrower to other options.
Make sure you have submitted the free federal student grant application, or FAFSAto receive all government grants. This includes free or earned help such as scholarships, grants and student trainee positions, as well as federal student loans.
For college students, federal student loans are the best option as they don’t need a credit history or a co-signer to qualify. Most personal loans do this.
Compared to federal loans, private loans tend to have higher interest rates and fewer repayment options or loan relief options. They should only be considered when all federal aid has been exhausted.
Who can co-sign a loan?
Virtually anyone with a qualifying credit history can co-sign a student loan.
That means you can co-sign a student loan for your child, grandchild, another relative, or even a friend. Private lenders look for co-signers with steady income and good to excellent credit scores, usually in the high 600 or above. They also take into account other debts that you already have.
A co-signer gives a borrower access to college funding that they would not otherwise have; it can also help the student build credit.
But just because you can co-sign a loan doesn’t mean you should.
How co-signing affects your credit
When you co-sign a loan, you hand over the keys to your loan to the student borrower.
The effects of co-signing can be felt even before a loan is approved: you will receive a temporary credit rating if the lender does a tough review of your loan history during the application phase.
Once approved, the loan and its payment history will appear on your credit report. Missed payments can affect your creditworthiness.
If the borrower cannot make payments and you cannot cover them, the loan may default. It’s a black mark that will remain on your credit report for seven years, among other things other financial consequences.
Other co-signature risks
Co-signing can affect your creditworthiness. Co-signing a loan increases the “debt portion” of yours Debt-Income Ratiowhich can affect your ability to get new credit for things like a car or house.
Late payments could have lenders or collectors after you. Once a payment is late or defaulted, you can hear from the lender or worse, a debt collection company. To avoid missed payments, encourage the primary borrower to sign up for automatic payment or to communicate with them each month before payments are due.
You can be held liable in the event of death or disability. It may sound morbid, but read up on the lender’s guidelines if a borrower dies or becomes disabled. If they do not allow forgiveness, then the responsibility for payments is yours alone.
What to discuss with the student borrower?
Co-signing requires an open conversation with the prime borrower who should understand the risks you are taking as a co-signer and how the long-term repayment will affect life after college. This discussion should include what they are studying, when to expect their graduation, and what their career prospects and income potential might be.
You probably know the borrower well, so ask yourself: Has this person shown that they are responsible enough to accept a loan commitment? Complete academic years? If the answer is no, consider advising the borrower of other options.
This is how you keep track of a jointly signed loan
When a lender makes an offer, read the loan note in full to understand all of the details. For example, private lender Sallie Mae says that the lead borrower and co-signer share responsibility for on-time payment.
To avoid future surprises, find out how much communication you’re getting as a co-signer. This can include when payments are made or how quickly you will be notified of a missed payment, along with any fees charged. Ask the lender how to get a notification e.g. B. by phone, email or post.
If the borrower tells you that he or she cannot make a payment before the due date, contact the lender immediately to learn about your options. You may be able to take advantage of a new repayment schedule or take a temporary break in payments.
This releases you from co-signing
There are two ways to get rid of the co-signing responsibility: co-signer clearance and refinancing.
Co-Signer Approval is a feature that you might want to look for in a personal student loan. Most lenders allow you to remove your name and legal liability from the loan once the borrower has made a certain number of on-time payments. This number ranges from 12 to 48 months, depending on the lender.
You can get the borrower on too Refinancing the student loanwhich removes your name from the loan and allows the borrower to combine their student loans into a single loan with a lower interest rate if that is the case. To refinance, they must meet credit and income requirements and have on-time payment.
How to sign a private student loan
When you are ready to sign a loan together, you and the borrower should compare offers from several student lenders including banks, credit unions, and online lenders to find the lowest rates.
As a co-signer, you want to make sure that the loan has maximum payment flexibility. Consider credit features like borrower protection – deferment and deferral – along with repayment options and the availability of co-signer approval.