Unless you’re a morlock and you’ve been living underground, you know that college isn’t getting any cheaper. Many students attending college bridge their financial aid gap with private student loans—and approximately 90% of those loans need a cosigner.
Have you ever cosigned for a student loan? Or has someone asked you to cosign for a loan? Better yet, do you know what cosigning for that loan really means for you? You should never take cosigning a student loan lightly. Let’s talk about why.
You Are Ultimately Responsible
When cosigning for a student loan (or any loan for that matter), remember that if the borrower doesn’t pay it back, you are responsible—no matter what.
If the borrower can’t make the payments for whatever reason, you have to take up the slack or face negative repercussions like delinquency and default lines on your credit report, collection costs, and tarnishing your good credit name. So, ask yourself if you really can afford the loan payments, because you may have to make them someday.
In fact, if the worst happens and the borrower dies, you may still have to repay the loan. Unfortunately, these cases have popped up in the news lately and they aren’t pretty. If you do co-sign on a student loan, strongly consider having the borrower take out enough life insurance to cover these debts should the worst happen.
For the entire life of that loan, your credit score will be affected—even though it’s not “your” loan. Before you yell “not fair!” remember that the lender considers you just as responsible for the loan.
This effect can be both good and bad. On-time payments will positively affect your score, but late payments will harm it. Also, having another loan you pay in installments affects your score. How much will depend on the rest of your credit report. In addition, the loan will impact your income-to-debt ratio, even if the borrower remains in good standing.
Remember that cosigning means you are effectively lending your good credit standing. Make sure that you are going in with your eyes wide open. (By the way, you can get a free copy of your credit report from each of the three major credit reporting agencies once every 12 months here.)
It’s A Matter Of Trust
Another piece of advice: make sure the borrower is trustworthy and someone you will be in touch with for the foreseeable future, just in case you start getting collections calls about that loan. Goodtime Charlie you see at happy hour who never has steady employment and is looking to go to a party school to live the “real” college life probably isn’t the best person for you to cosign for.
The bottom line is, if you wouldn’t lend them money, you shouldn’t co-sign for them. And you know what Judge Judy says: never lend money you can’t afford not to get back. On a similar note, you shouldn’t co-sign for money you can’t afford to pay back. Trust is a two-way street, guys.
By no means am I advising you not to cosign for your nephew who is an awesome biology student at a prestigious university. But, I am advocating that you consider everything before you sign that dotted line.
You may really help your nephew get a lower, more affordable interest rate to achieve his dream of becoming a doctor—and a doctor may really come in handy if he defaults on that loan along the way.
Did you cosign a loan for this semester? Let us know how you came to your decision in the comments.