Co-Signing Federal and Private Student Loans
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 the student should default on these loans after graduation. The federal government could garnish future earnings or even withhold federal income tax refunds to which they might otherwise be entitled. A federal student loan income repayment plan may give you the option to add a spouse or partner as a co-signer, too. Private student loans, on the other hand, don’t usually have the same level of collection capabilities, so they are more likely to require a co-signer on the loan. You as the co-signer will likely need to have a better credit score and credit report than the student, and you must agree to be responsible for repayment if the student does not repay the loan.
What To Consider Before Co-Signing a Student Loan
If you have been asked to be a co-signer, think carefully before agreeing. You certainly want the student to be able to attend college, but there’s no way to know what will happen after graduation when the loan payments are due. For example, 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 and the student might not be able to quickly find a job that pays well enough for them to afford the monthly loan payments. Whatever the reason, if they fall behind on payments, you could suddenly start receiving collection notices in your mailbox. Beyond those factors, it’s important to consider how co-signing for a student loan could impact your own finances. Keep reading before you sign on the dotted line.
You Could Be Responsible for the Entire Loan
Of course, we all focus on the positives and have the best of intentions, but so many things can happen. Even if the student is responsible and gets a good job, they could get sick, have unexpected expenses, lose their job, overextend their budget, or worse. None of this would release you from your obligation to repay the student loan. Talk this over with the student and with your own family to make sure you can afford to make these payments should the student be unable to.
Co-Signing a Student Loan Could Affect Your Credit
You might need to borrow money for your own use over the coming years, and being a co-signer could impact your credit and make it difficult for you to take out a home or car loan at a reasonable rate. Once the student loan starts 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.
A Co-Signer Release May Be Difficult To Obtain
Even if think you have the flexibility to pay back the loan if needed, something unexpected could happen in your life that could cause you financial hardship, making it difficult to afford the student loan payment. If that happened, you may look to be released as a co-signer. While this is possible in some circumstances, it may be more difficult than you think. Not all student loan agreements offer the option for co-signer release, while others only make it possible after the student has made a certain number of payments. You’ll need to contact the student loan servicer to request co-signer release. 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.
