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, including paying it off altogether. 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.
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 loans made by financial businesses, like credit companies or lending corporations.
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.
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 any additional late penalties, collection fees and other fees that can be charged if the student doesn’t make their payments on time.
If the student misses payments or sends them in late, here are some ways that you, as a co-signer, can feel the pain:
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.
Yes. 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.
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:
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 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.
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.
 Based on the article: How Student Loan Debt Can Impact Your Life, January 19, 2022
Adapted from the Federal Trade Commission
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.