Paying for college can be challenging, but in most cases a degree is well worth the cost. Many students turn to private student loans after they’ve exhausted all of their and options. However, most lenders require a for a . Having a helps ensure that the can be repaid even if the misses payments or defaults.
But cosigning a comes with inherent risk and isn’t something to take lightly. Should you agree to be a for a student, even though doing so can affect your own ?
Here are some key questions you should ask before agreeing to cosign a .
1. Why Does the Need a ?
A is often needed when a has no or a thin . This often applies to young adults who are just starting out and haven’t had time to properly build a good .
Other times, it’s due to where borrowers have missed payments or have derogatory marks on their .
Insufficient is another issue when a student is enrolled in college full-time and isn’t employed or earns very little.
Or, the may simply be under the age of majority – age 18, 19 or 21, depending on the state. Private student loans are subject to the defense of infancy where borrowers can dispute their responsibility because they were underage. Having a protects lenders in this type of situation.
It’s important to know the exact reasoning why the doesn’t qualify for a , as this can affect their risk level. Cosigning for a student who has carries more risk than cosigning for a student who has a thin or is underage.
2. How Much Are They Borrowing?
can add up in a hurry. A should know how much the student is borrowing and the average . The should also recognize that the student may need to borrow more money for subsequent years. Cosigning for a college senior involves less risk than cosigning for a college freshman.
3. What Are the Terms?
options can vary, making it important to know the term length. Standard is a fixed and takes 10 years to repay the .
Graduated for private student loans is different than graduated for . A graduated plan for a may involve four years of interest-only payments followed by 11 years of fully amortized payments.
Extended involves smaller monthly payments than standard but can take up to 30 years to repay, depending on the amount borrowed. This is an option for bigger student loans and may involve higher interest rates. are more likely to allow extended for variable-rate loans than fixed-rate loans.
Cosigners should know when a is considered late and what events will lead to a default. A is in default after 120 days of non-. They’ll want to know if the has any leeway with payments like an unemployment forbearance. Finally, they should look at the annual percentage rate (APR), interest and additional fees.
It’s wise for potential cosigners to approach learning these terms like they’re borrowing the money themselves.
4. Can the Afford to Repay the ?
Knowing a ‘s financial situation is a must. Here are some questions that should provide insight:
- How much money do they currently earn?
- Do they have the financial means to repay the ?
- Can they do so comfortably?
- What type of assets do they have?
- Do they have other , such as a , or ?
- What will their projected earnings be after graduating?
- How likely are they to graduate?
- Would they be able to continue repayments if they experience a temporary loss of ?
If there’s any uncertainty, it’s best to decline cosigning.
5. Is the Responsible?
It’s also vital to examine the ‘s prior track record.
- Are they responsible and mature?
- Are they trustworthy?
- Have they historically fulfilled their financial and non-financial obligations?
- Do they take their financial obligations seriously?
- Have there been any red flags?
Any uncertainty surrounding a student’s responsibility level could mean trouble for the . Asking these questions should provide an objective assessment.
6. Can the Afford to Repay the ?
Thirty-eight percent of cosigners end up paying some or all of a because the does not, according to CreditCards.com. There’s always the potential for late payments or default, regardless of how creditworthy and responsible the may be.
Even a well-intentioned person may suffer a loss of that prevents them from making repayments.
Assume for whatever reason the can’t repay their . Would the be financially able to handle repaying this themselves?
If not, they shouldn’t cosign.
It’s important to look at the worst-case scenario and closely examine one’s finances before making this type of commitment. Check whether making the monthly payments is feasible and how much financial strain it would create.
7. What Are the Risks?
A has a lot to lose. If the misses a or defaults, it can hurt the scores of both parties. CreditCards.com reports that 28 percent of cosigners saw their drop because the paid late or not at all.
If a uses collateral such as a vehicle to qualify for a , it could be seized to repay the .
It should also be noted that the money lent to a counts as the ‘s on both the ‘s and reports. In turn, they can appear as a greater risk to their own lenders and have more difficulty obtaining a . This means that cosigning a may make it harder for the to get a new or , or to refinance their .
Keep in mind that some private student loans have . This means the can change at any time throughout the life of the , which can potentially make the monthly payments more expensive.
On the positive side, the ‘s and should improve as long as payments are made on time.
Therefore, it’s essential to understand all the risks before agreeing to cosign a .
Some offer . allows a to remove the from their , if certain requirements are met. Lenders typically want to see proof of , a review and demonstrated creditworthiness from a before they will release someone from a .
is another way that a can release a . Refinancing means borrowing a new to pay off an existing . The new may have a different , and a .
Ask the Right Questions
Cosigning a student loan is a serious decision and carries a lot of risk. If you’re thinking about cosigning a loan, be sure to examine all aspects of cosigning a loan and do your research before signing the loan application.
Ready to take the next step? See the best private student loans here.
