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Cosigning Student Loans 101

Posted by Lindie Johnson on Jun 14, 2016 3:59:24 PM

If you are considering cosigning on a student loan for your child, a relative, family friend, or significant other, you should know first what you are getting into. Cosigning on a college loan should be taken seriously, as it could have a substantial impact on your credit, your relationships, your trust and your expectations in the future.

All too often, cosigners are so eager to help a student achieve their college dreams - which is no doubt admirable - that they fail to realize they are taking on equal responsibility for the loan. 

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When you cosign on a student loan, you are providing assurance to the lender that you are willing and able to pay the loan if the student does not. In most cases, the student wouldn't even be able to qualify for the loan without your signature, as traditional students rarely have the income and credit history to meet the loan underwriting criteria alone. 

Before cosigning on a student loan, you need to make sure you read the fine print on the application and promissory note and understand what your responsibilities are. Lenders typically reserve the right to collect on the debt from the cosigner even without first exhausting all opportunities to collect a payment from the student. 

Before you cosign on a student loan, you should also spend some time considering the following:

  • The affects on your credit report: When you cosign a student loan, it will be reported to the credit bureaus as outstanding debt in your name. If the student is late on payments or defaults, it will have a direct impact on your credit history and credit score. 
  • The impact on your debt-to-income ratio: Will you have other borrowing needs in the future that could potentially be impacted by having this loan? Lenders often use debt-to-income ratio as a component of approving a loan or assigning you a rate. Your debt-to-income ratio is the percentage of your monthly debt payments over your monthly income. The lower your debt-to-income ratio, the better. If you are looking to finance something in the future, will this loan affect your ability to get the best rates or get approved at all? 
  • Your relationship: How strong is your relationship with the person for whom you are cosigning? Is the relationship likely to end in the future? If it does, the cosigner  will continue to be legally obligated on the loan. 
  • Expectations & trust: Before cosigning, honestly ask yourself how likely is the student to repay the debt. The student may have good intentions, but do they have a proven track record of meeting their responsibilities? Is the amount they are intending to borrow a reasonable amount to repay given their career interests? What is your agreement with the student? While you are legally obligated to pay if the student does not, it is good to have a clear set of expectations with the student before you ever sign the note. 

If you are considering cosigning a student loan, you are doing a great thing to help a student move their life forward and achieve their dreams. But it is a responsibility that shouldn't be taken lightly and should be carefully considered before undertaking. Remember, before cosigning any loan, be sure to read the fine print and ask yourself some tough questions about your relationship, your credit and your expectations. 

Get the Guide to College Borrowing to rule out any questions you may have about borrowing for college.

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Topics: College Financial Aid, Borrowing for College