Risks of Co-Signing a Student Loan

Parents, families and friends of a college student may face the difficult decision of cosigning for a student loan if approached by the student. Parents definitely face this situation if their son or daughter is attending college, and there are a few facts to consider before cosigning for a student loan. There are risks involved that need to be assessed by those who are approached for help with a student loan. The number one risks involved with co-signing a student loan is the possibility of the student not paying their loan on time. If the student misses a payment, the co-signer will be held responsible for making the payments.

The next risk involved with co-signing a student loan for a student is the negative impact that could possibly take place. For example, if the student is unable to pay their student loan on time, the co-signer is responsible. However, if the co-signer isn’t notified about the student being late on payments, or if the co-signer is unable to make the payments on the student loan for the student, they will receive a negative mark on their credit score. Rebuilding a credit score takes time and dedication, which could take up to several years.

Another risk factor when co-signing for a student loan, or co-signing for any loan, is the inability to obtain other forms of credit and loans. Lenders not only look at the borrower’s credit score, they also consider the borrower’s debt-to-income ratio. If the borrower has co-signed for student loans, or other types of student loans, they may be disqualified for a new loan, regardless of the borrower’s credit score. Even if the student has never missed a payment, the debt-to-income ratio of the co-signer may be the deciding factor that will lead to disqualification.

Another risk is dealing with late payments. If the student is late on their payments, the lender will come after the co-signer, rather than the student. If the cosigner is ready to deal with all these risks, they should then find out the student’s financial situation. For example, in order to weigh these risks, the co-signer should figure out how much the student makes vs. how much debt the student has. Since the co-signer will ultimately be responsible for the loan, they need to weigh all the risks associated with co-signing for a student loan. Moreover, the co-signer should also consider their debt-to-income ratio before co-signing.

Since co-signing for a loan will tie up some funds on the behalf of the cosigner, the cosigner should determine if the process will impede their chances of obtaining a loan in the future. If the co-signer is not worried about their debt-to-income ratio, then this shouldn’t be an issue. However, the co-signer should be fully aware of the possibility of having to pay the loan if the student defaults. The majority of co-signers will usually be a family member or a very close friend. The risks associated with co-signing are considered too high to co-sign for a complete stranger.

In fact, it’s highly advised not to co-sign for a complete stranger. Moreover, co-signing should only be considered if the co-signer is in the financial position to do so. If the co-signer feels the risks are too high, they should help the student look for other options to finance their education. In some cases, co-signers will request the student to provide some form of security on the loan, like collateral. Unforeseeable situations in the future could cause the co-signer to have to pay to student loan on their own. Students should only ask family members to co-sign for their student loan if they are unable to qualify for a student loan.