What You Need To Know Before Cosigning A Student Loan
You may be thinking about cosigning a student loan for you child, but before you do, you need to know what you are getting yourself into. The truth of the matter is, most kids will need to take out student loans in order to attend college. According to Studentloanhero.com, of the students that graduated college in 2019, 69% had to take out student loans. So what should you do if you find yourself potentially cosigning a student loan? Read on.
The Risks of CoSigning a Private Student Loan
When cosigning a student loan or any other type of loan, you are taking a risk. With a private loan, you are taking on even more risk since these types of loans are treated differently. You are putting faith in the borrower that they will repay the loan with timely payments. Here are some things to consider before cosigning a student loan.
1. The loan is your responsibility
When cosigning a student loan, the responsibility for that loan falls equally on you as well as the borrower. So, if the borrower cannot make the payments for whatever reason, you are now on the hook for them. This can also lead to some dings on your credit report and if the loan goes unpaid for long enough, legal action may come after you to pay back the borrowed amount.
2. Expect this to be a long term commitment
When it comes to private loans, there are typically limited options when it comes to repayment. With that being said, loan terms can stretch out for upwards of 10 years if the borrower takes advantage of forbearances, deferments or interest-only payment periods. So repayment can actually get up to 15 or 20 years. You will find that some lenders will allow the cosigner to “sign off” after a certain amount of on-time payments have been made. This is not a common occurrence though so don’t assume this will be the case with your loan.
3. Ask about a cosigner release
Like we mentioned above, there may be a way to get released from cosigning a student loan. Usually, after about two years worth of on-time payments are made (or the borrower gets to a certain credit score), you might be able to have your name removed from the loan. Getting a cosigner release, is not so easy. The best thing to do is initiate automatic payments so that the payments will always be on time. You only want to apply for this release once the monthly payments drop to around 10% or less of the primary borrowers income. By waiting until this time, you help show that the primary borrower can indeed make the payments on their own.
4. Interest rates can fluctuate
When it comes to private loans, there are no caps on how high an interest rate can go. Furthermore, lenders are free to also raise the fee for late payments. So whether you make all on-time payments or not, your rates can go up.
5. Interest will start accruing right away
Private loans, unlike federal student loans, start accruing interest as soon as you receive your money. The interest will start to capitalize once the borrower graduates and the repayment grace period expires. This interest will then be added to the principal balance. This means interest will now be applied to the new, higher balance. So this essentially means interest on top of interest. So why is this important for the cosigner? The loan amount could really go up and the primary borrower may not be able to afford it.
Tips to help safeguard your credit
If you decide cosigning a student loan works for you, keep these safeguards in mind:
- Before taking out a private student loan, make sure all forms of federal financial aid have been looked at.
- Always have the student look into any scholarships they may be able to qualify for.
- Only borrow money that is absolutely needed. This means not taking out more than what the borrower thinks they can make at a job after they graduate.
- Have some agreement in place that says the borrower needs to repay you for any late fees or missed payments. If the worst happens and you wind up in court, at least you will be able to recoup some of your losses.
- Be the one in charge of the payments. Months can pass before you receive any notice of missed payments. By that time, your credit could have already taken a serious hit.
Cosigning a student loan is an important decision
Cosigning a student loan may be the only option for some people when it comes to paying for college. If that is the case, make sure you remember our above tips so that you don’t run into issues. Just always make sure you are exhausting all forms of financial aid before applying for a private student loan.