What to know about co-signing a student loan

If someone in your family needs a loan to help pay for college, you may find you’re being asked to be a co-signer. That’s a major financial responsibility, so you should know what’s involved before deciding to take on that responsibility. Likewise, the student you’re helping needs to understand what could happen to you if they don’t make their payments. With that in mind, here’s a list of the most commonly-asked questions about co-signing, along with some straightforward answers.

 

1. What does it mean to co-sign on a loan?

 When you co-sign on a loan, you’re saying you agree to make any payments which the person who’s receiving the loan doesn’t make. That includes paying all the principal and interest. Basically, you’re saying you’ll be responsible for the loan. As you read through the following questions, you’ll get a good idea of what that can mean.

2. What type of student loans might require a co-signer?

Not all student loans require a co-signer.  For example, student loans given by the US Government are only made directly with the student. Co-signing comes into play with private loans made by financial businesses, like credit companies or lending corporations.

3. Why might you be asked to co-sign on a loan?

It’s not surprising that most college-age students don’t have the credit history or financial resources to qualify for a loan on their own. So, they need to show a lender that someone with a good credit record will be responsible for assuring the loan gets paid back, in case the student can’t. Also, having a qualified co-signer on a loan might serve to lower the interest rate.

4. How much of a loan could a co-signer be responsible for?

The short answer is “whatever the student doesn’t pay.” This means you’re not only responsible for making sure the original loan amount and interest is paid back, you’re also responsible for any additional late penalties, collection fees and other fees that can be charged if the student doesn’t make their payments on time.

5. What can happen if the person I’m co-signing for doesn’t make their loan payments on schedule?

If the student misses payments or sends them in late, here are some ways that you, as a co-signer, can feel the pain:

  • Your credit rating can go down
  • Your future credit needs may be restricted or limited
  • You may get calls from collection agencies
  • You may be required to pay back all the remaining loan amount, plus any interest and fees, including any penalties for late or missed payments.

The point: as a co-signer, you are a co-owner of the loan. So any late or missed payments will show up on your credit report. That could affect your credit rating and your own ability to borrow.

6. How can I be sure the borrower will pay back their loan?

The bottom line is you can’t be sure. So even though you may care very deeply about the person you’re co-signing for, and know they would never deliberately do anything that could harm you, here are some important questions to consider:

  • How sure are you that the student will be able to make every payment for the life of the loan?
  • Have you looked at the total amount the student plans to borrow?
  • Will the student’s choice of a career support paying the monthly loan amount for years to come?
  • Most student loans start out with a payback schedule of ten years, but the average student loan actually takes 21 years to repay.

* So it’s important to ask: “Does it make economic sense for you and the student to take out this loan?”

For some guidelines on managing the dangers of co-signing, see “How to protect yourself when co-signing a student loan” below.

7. Is co-signing on a loan in the best interests of the student?

Your agreement to co-sign may make it easier or cheaper for the student to get a loan upfront, but they still have to pay it back. So do your best to make sure they can afford the payments. Here are some common problems faced by young people who borrow:

  • The need to make enough money to repay the loan could lead to them rushing into a job that might not be good for their future
  • Carrying student loan debt could limit their ability to buy a home or car, get credit cards; and sometimes even rent apartments
  • Missed loan payments can lower their credit score

8. What if I have other loans to pay back?

The student loan on which you’re co-signing may not be your only obligation. Will you be co-signing on other loans for other students? Or maybe for this student’s next several years in college? Are you already borrowing under a Parent Plus or other type of college loan? The numbers can add up. Unfortunately, a large number of co-signers have had to delay retirement to pay back a student loan.

9. If things turn out bad, can I declare bankruptcy?

In most cases, student loan debt cannot be discharged in a bankruptcy. So, even with all the other credit issues that bankruptcy may create, it probably won’t resolve any payment problems on a student loan.

[1] Based on the article: How Student Loan Debt Can Impact Your Life, January 19, 2022

How to help protect yourself when co-signing a student loan

  1. Ask the student to show you how they’ll repay the loan. Have them make a budget or work one out with you. Make sure the monthly loan payments are affordable — for both of you. If, after college, the student loses their job or has a change in finances, are you confident you’ll be able to afford the loan payments you’ll make for them?
  2. Ask the company making the loan to tell you the total amount you might owe if the student defaults. The creditor doesn’t have to do this. But if you ask, they might.
    IMPORTANT: You may not know if any loan payments are missed or late unless the borrower or lender lets you know. So be sure to ask to be notified.
  3. Ask the lending company to send you monthly statements, or to agree in writing that they’ll notify you if either the borrower misses a payment or the terms of the loan change. If the lender will send you the statements, this will alert you if the borrower missed any payments. If the lender won’t send the statements but will agree to notify you of any issues, that can give you time to deal with the problem.
  4. Communicate with the student borrower regularly. Make it part of your agreement that they’ll send you regular updates about the loan and any anticipated payment problems.
  5. Check your credit reports regularly. You may want to check your report as often as once a month to catch any missed payments or errors. If you see a missed payment, contact the student right away to try to resolve the problem.
  6. Check your state law for additional co-signer rights. Contact your state banking agency or attorney general to find out if your state has additional co-signer protections.

Be mindful of marketing messages

Here are two examples of how co-signing is marketed. What “buttons” are they trying to press to get you to respond emotionally, instead of thinking things through?

RELATED TOPICS:

How much should I borrow for college?

Learn more.

The different types of college loans

Learn more.

Helpful sites for parents and guardians

Learn more.