What to Know Before You Become a Student Loan Cosigner
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If you have a friend or family member who’s going to college, you might be asked to become a cosigner for their student loans. Becoming a student loan cosigner means you agree to pay a borrower’s debt if he or she defaults on the loan.
Typically, cosigners have good credit and a lengthy history making it common for parents to cosign loans for their kids to help them cover their college expenses. While mostly relatives and close family friends agree to cosign, anyone can become a cosigner for another person as long as they meet the credit requirements.
Cosigning any loan is a big deal, but with student loans, it’s crucial that you become aware of all the risks and cautions before signing your name on the dotted line because student loan repayment terms can easily last for 10 years or longer.
Here are four things you need to know before you decide to become a student loan cosigner.
1. Whether or Not Federal Loan Options exist
Cosigners are often needed for private student loans since your credit score and history will be taken into account. With federal student loans, there are no credit requirements so students can take out loans in their own name.
Plus, federal student loans also tend to have better interest rates even though there are limits to how much you can borrow.
Federal student loan limits are subject to change each year so you’ll want to refer to this updated list, but this year, first-year students can borrow up to $5,500, second-year students can borrow up to $6,500, and third-year students can borrow up to $7,500 during the school year.
It’s important to check and see if the borrower qualifies for financial aid and can take out federal loans first, before asking you to cosign for a private loan.
There may also be other federal benefits they can take advantage of to help cover the cost of college like grants, scholarships and work study programs.
2. The Terms of the Loan
Each student loan borrower receives a promissory note that they need to sign to confirm their agreement with the terms of the loan. If you’re considering becoming a cosigner, you’ll need to carefully review the promissory note as well.
Make sure you understand the terms of the loan along with what circumstances will result in the loan(s) going into default. As a cosigner, you’ll have to agree to pay back the loan if the borrower is unable to make payments. In some cases, this includes unfortunate circumstances like if the borrower becomes disabled or dies.
Make sure you and the borrower both understand this along with the type of repayment options that will be available. If you know the borrower may not be able to make payments while in school or after the grace period, you may want to reconsider cosigning the loan.
3. The Interest Rate
The interest rate is another important factor to consider when cosigning a loan. Private student loans tend to have fluctuating interest rates which can heavily affect what payments look like.
Sit down with the borrower to review their finances and calculate payment options along with the total cost of the loan, including interest.
It’s important to set realistic expectations so the borrower avoids taking out too many loans and struggling to pay them back later on.
Depending on how everything goes, you may only feel comfortable cosigning for loans up to a certain amount and there’s no problem with that if you don’t want to be on the hook for a huge student loan balance.
4. When You Can Be Released as a Cosigner
Cosigning for someone else’s student loans is a generous gesture. Often times, it can make the difference between the student being able to afford college and the student dropping out due to not being able to cover the cost of their tuition.
However, being a student loan cosigner doesn’t mean you have to be locked in for life. Once the student graduates and begins repaying their loans, you may want to relieve yourself of your cosigning duties, which will eliminate your risk.
Determine when you can stop being a cosigner by looking for a co-signer release provision in the loan. With this, the lender will agree to take your name off the loan after a number of on-time payments have been made by the borrower.
This can usually take around two years, but it’s a much better timeline than sticking around and having the student loans on your credit for a 10 to 20-year repayment term.
Another thing you can do is ask the borrower if they’d be willing to refinance their student loans once they graduate and have built up their credit history. Since refinancing involves getting a whole new lender and receiving a lower interest rate, it would also take your name completely off the loan.
Plus, the borrower could end up paying their loans off faster with a lower interest rate and continue to build their own credit in their own name.
If you’ve already cosigned on one or more student loans, you can start looking for refinancing options now; online lenders like SoFi and Credible make it easy to refinance student loans to terms with lower interest rates.
It’s important to carefully weigh the benefits and potential risks of becoming a cosigner on a student loan before you make such a huge commitment. Explore alternative options with the borrower such as federal loans, scholarships, extra income opportunities or other more affordable funding.
Also, consider your current financial situation and how becoming a cosigner could affect it. Just because you have a good credit score, doesn’t necessarily mean you should take on the extra debt.
If you decide to become a student loan cosigner, do lots of research and communicate clearly and openly with the borrower about the terms and what’s expected. Finally, get a copy of everything in writing.
Have you ever thought about becoming a cosigner before or used a cosigner to obtain student loans? Do the benefits of cosigning outweigh the risks? What are some other options you’ve pursued to help a family member with college costs without cosigning on a loan?