Many students are unable to qualify for the loan amount they need and must have a parent, relative or friend co-sign the loan to borrow the amount needed. Being a co-signer means that you and the student share the legal responsibility for repaying the student loan and making sure payments are made on time.
Agreeing to be a cosigner can help to make the loan approval easier and is a great way to help the student build their own credit history. However, being a co-signer on a student loan is not without high-risks.
Even if the primary borrower is known to be financially reliable, there are a few factors that may cause a problem in repaying the loan. The student or primary borrower may decide after a semester or two that college is not for them. As a result, they may end up un-employed or working a job that doesn’t pay enough to make the consistent loan payments. There is also the possibility that an unforeseen events or hardship will prevent the student from being able to repay the loan.
Three Major Risks to Consider Before Co-Signing:
- Your Co-Signed Loan Could Damage Your Credit Report – When you co-sign a student loan, the loan will appear on your credit report and it may impact your credit score and your ability to borrow in the future. Even if the primary borrower makes all the payments on time, the debt impacts your utilization ratio (the amount you owe to your total credit limit) and debt burden. In other words, when you apply to borrow in future, lenders will think the co-signed debt is your debt. Even worse, if the primary borrower misses a payment, your credit score could take a big hit. A single payment that is 30 days or more delinquent could take 90 to 110 points off your credit score and that will stay on your report for seven years.
- The Lender May Collect From You First – According to the Federal Trade Commission, it is a good idea to check the co-signer’s notice regarding whether you are guaranteeing the debt and whether the creditor has the right to collect from you before the borrower. The creditor can use the same collection methods against you that can be used against the borrower, including suing you or garnishing your wages.
- The Debt Could Increase Exponentially If Not Paid Timely – You may have to pay up to the full amount of the debt if the borrower does not pay including late fees or collection costs. In addition to possible garnishment of your wages, your Social Security benefits or tax refunds can also be garnished.
Finally, if you do co-sign a loan, ask the creditor to agree, in writing, to notify you if the borrower misses a payment or the terms on the loan change. That will give you time to deal with the problem or make back payments without having to repay the entire amount immediately.
At Financial Consulting Group, our team brings over half a century of combined experience in the financial services industry. We provide our clients with personalized, comprehensive financial planning that will continue to serve their families for generations. Let us help you protect your best interests by assessing your financial situation and the student loan you are considering co-signing. Call us today at (504) 835-1707.