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Deciding whether or not to be a co-signer on a student loan requires careful consideration. After all, you are legally obligated to pay off your student’s debt if they can’t pay it. Before deciding if co-signing is right for you, make sure you understand the risks you face when signing on the dotted line on a loan application.
Who can co-sign a loan?
A student loan the co-signer is usually a parent or guardian, spouse or other relative, or perhaps a close family friend of a borrower. As a general rule, the only criteria required are that the co-signer be of legal age, a US citizen and join the loan without constraint. But ideally, a co-signer will also have strong credit and income to help the primary borrower qualify for a loan.
Student loans cover college or higher education, and if the student does not have good credit or a strong credit history and has exhausted all federal loan options, which generally do not require a co-signer—Cosigning a loan may be the only way to get a private student loan to help with college expenses.
How to decide if you should co-sign a loan
When you co-sign a loan, the student borrower benefits more than you do. Before accepting co-sign a loan for your child, niece or nephew, spouse or friend, think carefully about the commitment and the implications.
“It’s a very emotional decision, but the financial consequences are often overlooked or misunderstood,” says Fred Amrein, college finance and student loan expert and CEO and founder of PayForED, a technology company that helps students maximize value. ‘financial aid. “Often these are only recognized when the default occurs or the co-signer is trying to fund something for themselves.
When you are a co-signer, you need strong credit. Lender requirements vary, but most institutions require co-signers to have a credit score of 670 or better and income reserves in the event of default by the primary borrower. Other factors typically considered include employment history, credit history, or how long a co-signer has resided or owned their home.
Benefits of co-signing a student loan
Be a student loan co-signer offers several advantages. Here are some important reasons to consider co-signing a student loan:
- The student becomes a better candidate for the loan. Lenders typically require a positive credit history, income requirements, collateral, cash reserves, or a reasonable debt-to-income ratio. It is unlikely that a student will be able to meet these loan thresholds. With a co-signer, however, the situation is less risky for lenders and they will take into consideration your credit history, income, and other factors.
- The student can benefit from a lower interest rate. When you are added to the loan application with your student, your creditworthiness can affect the interest rate offered by the lender. A lower interest rate will affect the cost of the loan and may qualify the student for a larger loan.
- The student will build his credit. By making loan payments on time, your student will build a positive credit history. These positive actions can help your student achieve a good credit score, which can lead to lower interest rates on properties, cars, credit cards, and other types of loans.
Disadvantages of co-signing a student loan
Co-signing a student loan involves significant risks. Here are the biggest drawbacks:
- Your debt to income ratio will be impacted. When you take out a loan or co-sign a loan, debts come into play. Becoming a co-signer on a student loan for another borrower can make it more difficult for you to take out a loan later. For example, if you want to buy a car or vacation property, lenders will assess your debt-to-income ratio – that is, your monthly debt versus the money you bring home. Student debt, even if it’s a loan that you co-signed, affects this ratio.
- It is your responsibility to repay the loan. Since the co-signer is also responsible for the loan, you will still be held responsible if the primary borrower fails to meet the loan obligations. The loan will be included in your credit reports, and if you or the borrower is late or misses repayment, it will negatively impact your credit score. Besides the credit implications, there are legal implications. A court could hold you liable for the debt, including any applicable legal fees. Your only recourse at the end of a delinquent loan scenario might be to sue the primary borrower, which could be an uncomfortable prospect, especially if you and the borrower are tied.
- You could face serious negative repercussions on credit. If you’ve worked hard to build a good credit score, know that you could cause real damage to your credit if the student borrower stops paying off the loan and you don’t pay the debts. Private student loans can default as soon as you miss a payment.
- Your relationship can become strained. If the student fails to make their payments, or even if the payments are late, your credit will be negatively affected. This can damage your relationship with the student. They may not realize the long-term implications, and your frustration may cause friction in your relationship. It is something that can change the family dynamic.
- Credit blemishes remain on your credit report. If you or the borrower miss payments, the credit bureaus will keep it on your report for up to seven years, long after the potential damage to your credit score has ended.
“As a co-signer, the greatest risk of co-signing a student loan is that you cede control of your credit rating to the student borrower,” says Alyssa Schaefer, director of marketing at Laurel Road, a private student loan platform. . owned by KeyBank. “Any missed payment can hurt your credit and can even lead collectors to sue you if payments are repeatedly missed. In the worst-case scenario, co-signing a loan could mean that you are liable in the event of the death or disability of the student borrower – another reason to read the fine print carefully to assess whether your lender allows forgiveness in. such circumstances.
What is a co-signer authorization?
Before agreeing to be a co-signer, be prepared to remain so for the duration of the loan. In some cases, however, you can obtain co-signer authorization.
If you are considering co-signing a loan, Schaefer advises making sure that the loan includes payment flexibility and a co-signer release, i.e. when the co-signer is removed from the loan agreement and is not more responsible for the loan obligations.
According to the Consumer Financial Protection Bureau, some lenders Release the co-signer of the loan after the principal borrower or student borrower has made a specified number of payments on time and meets credit requirementsincluding passing a credit check.
Laurel Road, for example, offers a release of the co-signer after 36 consecutive payments on time. The borrower must always meet the lender’s underwriting standards, Schaefer says.
If your private loan does not allow a release of the co-signer, refinance student loan on behalf of the student is another option. A refinanced loan allows you to remove the name of the co-signer and combine multiple loans into one loan with a potentially lower interest rate.
The bottom line
Before co-signing, discuss repayment expectations with the student. Upon graduation, a plan should be in place.
“A parent or family member chooses to co-sign a student loan so that the borrower can pursue higher education,” says Dennis McNamara, financial planner and co-founder of wHealth Advisors in Red Bank, New Jersey. “Right from the start, it should be understood that the release of the co-signer should be a priority after the borrower’s graduation.”