High school graduations are underway across the country, and many families are now making plans for college in the fall. For many people, finalizing financial aid packages and signing for student loans are among the items on the to-do list.
While federal loan programs cover much of the cost of tuition, some students may need to supplement that financial aid with private loans. To qualify, parents or grandparents may be called upon to co-sign the loan.
When that happens, parents may be happy to oblige only to later realize they didn’t understand the ramifications, says Mike Brown, research analyst for LendEDU. The website, a student loan marketplace, surveyed 500 parent co-signers in February 2017 and found a third of respondents didn’t understand the risks of co-signing when they agreed to it. “The lack of knowledge on their end is concerning,” Brown says.
To avoid making a mistake, here are seven things you need to know before co-signing a student loan.
1. A co-signed loan shows up on your credit report. Co-signing a loan is exactly like taking out a loan for yourself. “A lot of people misinterpret co-signing as a safety net, but that’s not really the case,” Brown says. “You’re really an equal partner with your child.” The loan will show up on your credit report and missing or late payments will be there as well. What’s more, the outstanding balance will count toward your debt-to-income and debt-to-credit ratios, factors that can affect creditworthiness.
[Read: How to Cope With Student Loan Debt in Retirement.]
2. If the student fails to pay, you are responsible for the balance. In a worst-case scenario, in which a student defaults on the loan, the co-signer becomes responsible for paying it off. If a co-signer refuses to pay, the debt can be sent to collections or even taken to court. While state laws vary, many allow for court ordered garnishment of wages to repay private student loans.
Parents and grandparents should expect their child will need at least some assistance repaying their loans. Of those surveyed by LendEDU, 66 percent of co-signers say they have helped make monthly payments.
3. You may not be notified if the student misses a payment. While co-signers are held responsible for paying off a student loan, don’t expect a lender to notify you if your child misses a payment. Policies vary by financial institution and some won’t get in touch with a co-signer until the account is seriously delinquent.
Nancy Bistritz-Balkan, director of public relations for the credit bureau Equifax, says that’s something people need to ask a lender before signing. “Before we put ink on paper, what is your policy if my child misses a payment?” she suggests asking. “It’s really important to know that on the front end.”
[Read: Stop. Drop. And Read This Before Becoming a Co-signer.]
4. It could affect your ability to finance other purchases. Before co-signing on a loan, a parent or grandparent needs to consider his or her own financial situation. “They are essentially attaching their credit to a loan which puts their [credit] score in the hands of the primary borrower,” Bistritz-Balkan says. A primary borrower who pays late or defaults could cause damage to a co-signer’s score that may take years to correct.
What’s more, those who are financing a major purchase should consider whether co-signing could affect their chances of getting approval or a preferred interest rate. Even if the student pays back the loan on time, having a large loan balance on a credit report could change someone’s creditworthiness.
5. You can get your name removed from the loan later. Brown says many people don’t realize they can request a co-signer release, which takes their name off the loan, but it can be difficult to obtain. The Consumer Financial Protection Bureau reported in 2015 that 90 percent of co-signer release requests made to private student loan providers were rejected. To increase your chances of approval, Brown recommends having at least a year of on-time payments before making the request.
Another way to remove a co-signer’s name is to refinance the loan. This can be done after a student graduates and has obtained steady employment. At that point, he or she may be able to qualify for a refinanced loan without a co-signer.
6. With some loans, you may not actually be co-signing. Brent Wilsey, president of Wilsey Asset Management in San Diego, says parents need to be careful when students ask them to sign on a loan. Some loan products won’t even list a student as a responsible party. He had one client sign for a Parent PLUS loan, not realizing the program put the debt in her name alone. “She did not know that by signing on that loan, her son wasn’t responsible for [it],” Wilsey says. “She was.”
[Read: How to Prioritize Retirement Versus College Savings.]
7. It’s OK to be nosy about the student’s finances. Co-signing for a loan can put you on the hook for thousands of dollars in debt, and student loan experts say parents and grandparents should absolutely be asking questions about if and how a child will pay back that money. “Don’t jump into co-signing a student loan if you don’t understand the risks, your options or your child’s financial situation,” Brown says.
Wilsey goes one step further and recommends co-signing only if a child has demonstrated significant commitment to his or her education. “How much skin has that child put into the game?” he says. If a child hasn’t been pursuing all avenues of funding for his or her college education — including scholarships, grants and employment — parents should think twice about putting their financial reputation on the line.
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7 Things to Know Before Co-Signing a Student Loan originally appeared on usnews.com
