What are Risks of Cosigning a Student Loan?
When you co-sign a student loan, the first thing you should remember is that you are equally responsible for the loan repayment. There are risks to cosigning a student loan. In the event of a loan default, the lender will demand the payments from you. Before you become a co-signer to a student loan, consider the following risks objectively:
While it may appear counter-intuitive, the reality is that the lender will straightaway look for you if there is a default on the student loan repayments. Consider the facts from the lender’s perspective. They might not have given the loan to the borrower, and they did so only because you agreed to become the co-signor.
It is easy to get emotionally convinced about a situation when your signature can literally change the life of another person and open their doors of opportunity for a promising education and career. In that moment of sentiment and excitement, it is easy to ignore that the student may already have a bad credit.
If that is the case, their stakes are already low about maintaining a credit score because it is bad to begin with. And you have a lot to lose because your high creditworthiness only put you in the powerful position of a co-signor.
When you co-sign a student loan, you are liable for 100% of the unpaid balance if the borrower defaults. Lenders will usually not agree to a compromise, and you may end up with having to pay off the full balance. Therefore, think of not just the loan amount but also the length of the loan.
When you cosign a student loan, you are not doing it for a few months, but for the full duration of the loan. In many cases, this could run into years. A default could derail your own plans for your children’s higher education or buying a home, or you may have to file bankruptcy and lose your entire financial reputation.
This loan will also impact your credit score and appear on your credit report. It may make it more difficult to qualify for other types of credit.