Should You Cosign on Someone's Student Loan? Know What's Involved First
You’ve been asked to cosign for someone’s student loan. It’s not a decision you should make lightly—cosigning can have very serious consequences for your finances and credit record. Here are a few things you should consider before saying yes.
Things You Should Know Before Signing
You’re responsible for repaying the debt if the student defaults
Cosigning a loan so some can attend college online means that you agree to repay the loan if the original borrower can’t or doesn’t. You agree to take responsibility for it. This means you could be on the hook for the full amount plus interest if the original borrower can’t or won’t pay. Some lenders are particularly aggressive, and may start pursuing you for payment after the original borrower is only a couple of days late on a payment. Lenders often go after cosigners before the original borrower because they are seen as more financially stable and more able to pay.
Your credit could be affected
Cosigning on a loan is a big decision. You should never do it if you genuinely can’t afford to pay back the whole thing—plus interest—if the worst-case scenario happens.
Cosigner release options may help
Some lenders will allow the cosigner to get out of the loan obligation if the borrower has made a certain number of payments on time—somewhere between 24 and 48, usually. But the borrower needs excellent credit and a steady job, and it can be difficult for cosigners to qualify for these releases even if they’re provided.
Your credit could give the borrower a boost
That said, your good credit will help improve the situation of the borrower. With your cosignature, the borrower can get a loan much more easily and will likely have a lower interest rate—making the payments easier to manage over the long run. If you are cosigning for someone you know is reliable, you could be doing a good deed—helping the person pay for college in a much more affordable way.
Consolidation may help
Bear in mind that if the borrower consolidates their loan—either federal or private loans—this releases the cosigner from any responsibility, as it effectively replaces one loan (or group of loans) with another. However, it’s a bit more difficult to get out of private debt that way, as private consolidation loans usually also require a cosigner.
Questions to Ask Before Agreeing to Cosign
Is there anyone else the person can ask?
If you’re the parent, you may be the first person to ask if the borrower needs a cosigner. However, if you’re a more distant relative, ask yourself why the borrower isn’t asking his or her parents or another, closer family member instead. You should take on this responsibility only if the parents have a strong, valid reason why they won’t co-sign on the loan—for instance, the parent’s credit is damaged enough not to be much of a help.
Can the borrower reduce the amount taken out?
Does the borrower need a loan this large? Is some of that private loan money for cost-of-living expenses that could be earned by getting a job instead—or significantly reduced? Does the borrower have to go to the expensive school—can he or she go to a less expensive school instead? As cosigner, you have a legitimate right to ask these questions.
Why does the borrower need a cosigner?
People need cosigners because lenders have turned them down for loans. There’s a reason they do that. Maybe the person has bad credit—a history of not paying loans back on time—or the lender considers them a risk for another reason. If lenders consider this person a risk to lend to, you should too—and really consider whether you’re willing to bail this person out if they can’t pay back the loan.
Can you afford to pay this loan?
If the person you’re cosigning for defaults, there’s a high chance you may be the one repaying at least some, if not all, of the loan. Never cosign a loan that you can’t afford to take on. Even if the borrower is a responsible person with a strong sense of obligation, he or she could lose a job, get sick, or face other challenges that make paying off the loan difficult or impossible. Do the financial calculations, assess your situation, and decide whether you could handle it if the worst-case scenario happens and the borrower defaults—which could happen through no fault of their own.
Cosigning on a loan is a big decision. You should never do it if you genuinely can’t afford to pay back the whole thing—plus interest—if the worst-case scenario happens. In addition, large financial agreements can put immense strain on friendships and family relationships—something that may be worth considering as well before you decide to cosign. However, cosigning can work for some people—and for some borrowers, it can make college much more affordable. Talk to a financial advisor to get a professional opinion before you make the decision.
More About Understanding Student Loans
- Credit Repair Services You Should Never Pay For
- Questions You Should Ask Before Applying for Student Loan Forbearance
- The Bank on Students Act: What It Is, and How It Could Help Student Borrowers
- How the Death of a Co-Signer Can Affect Your Student Loan
- Peer-to-Peer Student Loans: What They Are, and How They Can Help You Pay for College
- If You're Unable to Work Because of a Disability: What Happens to Your Student Loan?
- New Rules for Debt Collectors: How They Could Affect Your Student Loan
- Having Trouble Repaying Loans? The Department of Education May Be in Touch