Should You Co-Sign for Student Loans?
Using student loans to help cover the costs of a college education can be a smart financial move, but it is not one that should be taken lightly. The decisions you make now about the amount of money you are going to borrow based on future projections of your ability to repay your debt could have long-lasting financial implications for you and other family members. After you have exhausted all other forms of financial aid and scholarships, though, taking out a loan may be your last resort.
You need to realize that there are two types of student loans — federal and private. Federal student loans usually do not require a co-signer, but they do have some stringent collection practices if you should default on these loans after graduation. The federal government could garnish future earnings or even withhold federal income tax refunds to which you might otherwise be entitled.
Private student loans, on the other hand, don’t usually have quite this latitude in collection capabilities, so they are more likely to require a co-signer on the loan. This is somebody who has a better credit rating than the student does, and who agrees to be responsible for repayment if the student does not repay the loan. Often it is a parent, grandparent, relative or close friend who agrees to take on this risk.
What to Consider Before Co-Signing
If you have been asked to be a co-signer you want to think carefully before agreeing to this. You certainly want the student to be able to attend college, but there is no guarantee of what happens down the road. Although many promises are sure to be made about responsibility, things can change very quickly after graduation. The student may over-borrow and have more loans that can easily be repaid, the job market might not be as promising as it once was, or the student might not be able to quickly find a high-paying job. Whatever the reason, he or she falls behind on payments and you suddenly start receiving collection notices in your mailbox. Here are some things to consider before you agree to sign on the dotted line to help pay for a college education:
- You could be responsible for the entire loan: Of course, we all focus on positives and have the best of intentions, but so many things can happen. Even if your student is responsible and gets a good job, he or she could get sick, have marital problems, be in some type of accident, or even die. None of this would release you from your obligation to repay the private student loan. Talk this over with the student and with your own spouse to make sure you can afford to make these payments should the worst come to pass.
- It could affect your credit rating: You might need to borrow money for your own use over the coming years, and being a co-signer could make it difficult for you to take out home or car loans at reasonable rates. Once the student loans start coming due, any late or missed payments on the student’s part could also reflect badly on your credit. Make sure the student has a solid understanding of the total amount of money that is borrowed, how much needs to be repaid after interest is calculated, what the total monthly payment will be, and when payments will begin.
- It could be difficult to get out of your obligation: Even if think you have the flexibility to pay back the loan if needed, something unexpected could happen in your life as well. You might think you are protected because the loan agreement has a release clause but read it carefully. It might not be possible to get released until the student has made a certain number of payments. Loans are often sold to third-party collection sources which might not agree to the release clause, and they could start coming after you for payment.
Advise your student to rely first on available federal, state and institutional financial aid before asking you to co-sign on any private student loans.