Private student loans can be a useful tool to help families pay for college. However, approximately 93% of private loans require a co-signer—and co-signing is a serious responsibility.
When you co-sign, you put your own credit and finances on the line for someone else. In fact, many lenders use the term "co-borrower" instead of "co-signer" to make it completely clear that everyone signing the loan is equally responsible for repayment. Before agreeing to this, make sure you understand everything you're getting yourself into.
Know The Risks
If the main borrower can't or won't repay a loan that you co-signed, then you'll become responsible for paying it back. If you don't repay the loan, then you could face repercussions like collection costs and delinquency and default lines on your credit report.
Even if you're not the loan's primary borrower, your credit score will be affected for its entire repayment period. This can be both a good thing and a bad thing. If the borrower makes on-time payments, that will have a positive effect on your score—but late payments will damage it. Also, having a loan that's paid in installments can affect your score. And, even if the borrower remains in good standing, the loan will have an impact on your income-to-debt ratio, which could affect your ability to take out other loans in the future.
Unlike federal student loans, most private loans lack any kind of provision for death, disability, or economic hardship. That means private loans need to be repaid, no matter what circumstances the borrower faces … even if one of those circumstances is death. This has led to terrible stories about parents still having to pay off loans for their deceased children.
Before you co-sign for a loan, you can do a few things to help prevent any issues from popping up:
Make sure the borrower is trustworthy. If you wouldn't lend them money, don't co-sign for them. And don't co-sign for anyone whom you won't be in touch with for the foreseeable future. You'll want to be able to reach this person easily if you start getting collections calls about that loan.
Ask yourself if you can afford to pay back this loan. If you really can't afford the loan payments, don't co-sign for the loan—because you may wind up having to make the payments someday. Use a calculator to estimate whether you'll be able to afford repayment. Before you co-sign, it's also a good idea to create a plan for what you'd do if you found yourself in a position where you had to pay the loan back on your own.
Understand co-signer release options. Under certain circumstances, lenders will release co-signers from a loan and free them of this debt obligation. Typically, this occurs if the primary borrower meets certain repayment conditions, like making a set number of payments. Check the loan's paperwork (especially the fine print) to see if this option is available and what requirements must be met to trigger it.
Re-evaluate your life insurance coverage and consider adding life insurance for your child. This one is for parents who co-sign a child's loan. Having enough life insurance to cover the cost of the loan should protect everyone involved if the worst happens and someone dies before the loan is repaid.
Keep an eye on your credit report. You can get a free copy of your credit report every 12 months. It's a good idea to know exactly where your credit stands before you co-sign. Also, after you co-sign, your credit report will provide a good indication of whether the borrower is making payments on time. If he or she falls behind, you'll be able to get involved before things get too serious.