What Are the Risks of Cosigning a Student Loan?

With rising college costs, it is critical that you understand the different types of financial aid available to the families of students who wish to pursue higher education. College Savings Plans, Scholarships and Grants are typically the best sources of money to pay for college, but aren’t always enough. When college costs outstrip available funds and financial aid that does not require repayment, student loans are generally used to make up the difference. If you find that student loans are necessary to fulfilling your student’s higher education goals, you should begin by looking at ways to Minimize Student Loan Debt.

Federal Student Loans

If borrowing money becomes necessary, Federal Student Loans — both subsidized and unsubsidized — should be pursued as the primary loan source. These loans are entered into by the student and do not require a cosigner. Additional benefits of these loans typically include:

• Lower Interest Rates
• Repayment Deferral While the Student Is in School
• Interest Payments Are Tax Deductible in Some Cases
• There Are Options for Deferral or Forbearance During Repayment When Necessary

Private and Supplemental Student Loans

If savings, scholarships, grants, and Federal loans still aren’t enough, you can begin looking at private and supplemental loan options. Private loans are available through many financial institutions and some states offer supplemental loans like the New Jersey College Loans to Assist State Students (NJCLASS) available through the Higher Education Student Assistance Authority (HESAA). It’s important to note, however, that most of these types of loans require the student to have a cosigner.

Cosigning a Student Loan Is Risky

A cosigner’s established credit history often results in higher borrowing limits and lower interest rates, but cosigning isn’t without its risks. To begin with, when a student loan requires a cosigner, both the student and the cosigner are listed as borrowers on the loan, meaning that they are both responsible for the repayment of the loan.

As a cosigner, the risks you take on with a private or supplemental student loan include:

• The loan and its payment record are listed on your credit history.
• You are taking on new debt, which affects your credit score.
• Any late payments on the loan reflect on your credit history and credit score.
• You are liable for repayment of the loan if the student is unable to repay the loan at any time.
• Your responsibility for the loan is equal with that of the student borrower.
• If the loan defaults, the lender can attempt to recoup the balance of the loan from you.
• Financial institutions are not obligated to keep you up to date on the loan’s status.

It’s important to remember that cosigning a student loan is essentially the same as taking out a loan in your own name. Careful evaluation of the loan’s interest rates, terms, penalties, and repayment schedule is a critical action that should be part of the borrowing process.
If you choose to cosign a student loan, you should have a serious discussion with your student regarding the financial obligation that you are both taking on. Make sure that they understand that their actions or inaction can reflect on your financial position as well as their own.