Cosigning a Student Loan: What You Need to Know
It’s no secret that the price of college tuition and other costs are increasing, so many students need to rely on loans to finance their education. But what happens with ones that can’t get a loan on their own? They might have to turn to a cosigner in order to secure funds. Here we will discuss what you must know about cosigning a student loan and when and why it can be a good option.
Becoming a cosigner for a student loan for your child or another loved one may be a noble act but there are a few things you need to know first. If you decide to cosign a student loan that essentially means that you will legally be responsible for repaying the debt if the borrower is unable to do so. Don’t overlook that this is a big responsibility, so you need to be sure you can afford to make payments if necessary. Many people wonder does cosigning a student loan affects credit, and the short answer is yes!
Before you make a decision whether to do this or not, it’s important to have a serious conversation with the borrower about their repayment plans. You need to be sure that they understand their responsibility to repay the debt and have a plan for how to do so in the future.
This is a big decision, so make sure you also understand all of the risks involved before making any commitments.
What Exactly Is Cosigning?
When it comes to any loan, cosigning is when someone agrees to be responsible for repaying the loan if the borrower cannot. Most commonly this is done by parents or guardians of their children. Don’t forget that the cosigner becomes just as responsible for the loan repayment as the borrower is.
If you are not in a good financial position, it probably isn’t a smart decision to take on this responsibility. Being unsure whether you can afford payments or not or just blindly believing in the borrower’s ability to pay it off can get you in a really bad position if something doesn’t go according to the plan. You should only cosign for someone you trust completely and know that is being financially responsible. What essentially happens if you cosign a student loan and the borrower does not make their payments on time, is that your credit score drops significantly. And to answer the question, do student loans need a cosigner, the answer is often no, so present some other options for a borrower who wants you to cosign.
How Does Cosigning on Student Loans Work?
Now that you understand what cosigning is, let’s see how it works and what it could mean for your finances.
After a student has asked you to be a cosigner and you agreed, the next thing is getting ready all of your paperwork. Like with any other loan, you need to provide the documents stating your current income and employment history, and the lender will look at your credit score to determine how creditworthy you are. Don’t forget that cosigned student loans are still a legally binding agreement that you’re willing to share the responsibility of repaying the loan on time and in full.
This can have a major impact on your credit score and your ability to borrow money in the future. So, remember that you can’t just cosign and then forget about the loan, you should still stay involved throughout the repayment process to make sure everything is on track.
Who is Eligible to Cosign a Student Loan?
There are just a few eligibility requirements that must be met before you can cosign a student loan. As to who can cosign a student loan there are only a few demands:
- Must be a U.S. citizen or permanent resident
- Have a good credit history, and
- Be at least 18 years of age
Pros and Cons of Cosigning a Student Loan
Before cosigning a student loan there are several things to think about. Here we will discuss some of the most common pros and cons associated with these loans:
- You can help your child or other borrower get a lower interest rate.
- You can get released from the loan when the student establishes good credit.
- It will help your child or other student build credit, and have better loan offers in the future.
- You may be able to defer payments on the loan if the borrower is having trouble with payments.
- If the borrower misses their payment, it will affect your credit score.
- You will be responsible for the entire loan if the borrower defaults.
- This process could strain your relationship if things go wrong.
- Debt will show up on your credit report and could negatively impact your credit history.
Before you agree and sign anything, weigh out these pros and cons. It’s not selfish to also look at your interests before thinking of someone else’s. If you, for example, want to take out a loan in near future, your options may not be that good or you may have none at all if the borrower keeps missing the payments and lowering your credit score. In case you are unsure whether or not cosigning a student loan is right for you or unsure if you are comfortable with the risks, talk to a financial advisor to get some guidance and more information.
Is Cosigning a Student Loan a Good Idea?
As you probably already know, the cost of college continues to rise, and more and more students are taking out loans to cover their educational expenses. Student loans with a cosigner can be a good option for your child or another loved one, and maybe even a good idea for you. Still, there are a few things you should keep in mind. We already talked about all the potential risks and yes, you will be responsible for repaying the debt if the borrower is unable to do so. Keep in mind that it doesn’t have to be such a big financial burden if you just make time to talk to a borrower and help in making their repayment plan. If the borrower is ambitious, and just wants to get a good education and later on a good job, contributing to this process can be a rewarding experience.
In the end, it’s all up to you. Looking at all of the pros and cons can help you make a decision but don’t forget about the most important part- talking to your child or borrower you chose.
When Is It Appropriate to Cosign a Student Loan?
Many people wonder do you always need a cosigner for student loans, and the answer is no! There are many student loans that require no cosigner. But, in some cases, the borrower may have exhausted all the other options and this is the only one left.
Loans that need a cosigner should be a last resort after scholarships, grants, and federal loans have been explored. It is only suitable to decide to be a cosigner if you can afford it. If your borrower is reliable the chances are high that you will never need to pay anything on this loan, but being sure you can pay it off if something goes wrong, can put your mind at ease. Nonetheless, be aware of the interest rate and repayment schedule and stay involved in the whole process.
As you can see, being a cosigner isn’t such a simple process and easy decision to make. There are a lot of factors that should influence judgment. Now that we covered how this process works, let’s answer: should you cosign for a student loan? Well, as you probably guessed, the answer depends on you and your needs and goals. If you just want to put your child through school but don’t have a huge college fund with saved-up money, this process can help make your child’s or borrower’s college experience less stressful.
It’s a big responsibility, and it’s not something to be taken lightly. Be sure to do your research and talk to a financial advisor as well as with a borrower about their plans for after graduation.