Things to Know Before Co-Signing A Student Loan

Inflation and increased expenses have always been a matter of concern. With the cost of healthcare, automobile, and groceries skyrocketing, the education sector isn’t far behind, either. Higher education expenses have become quite an obstacle for parents these days. The government, however, has provided several provisions for students who wish to continue their studies. There are federal loans available to aid students, but they too come with a certain withdrawal limit. This leaves students with no other option but to take loans from private lenders or other financial institutions. However, procuring a large loan is another hurdle for students due to lack of a steady source of income or a credible credit score. Hence, students look for co-signers on their student loans to add credibility to it. Generally, the parents or local guardians of a student can co-sign the loan with them. 

But co-signing a loan can be a bit tricky. Here are the six important things you must know before you co-sign a student loan:

Understand the loan structure

Generally, when you co-sign a student loan, you are putting your credibility at stake. There are three parties involved in such loans:

1. Lender: The lender makes the funds available to the borrower. 
2. Primary borrower: A primary borrower is someone who is responsible for repaying the borrowed loan under the given period, as per the stated terms and conditions.
3. Co-signer: A co-signer is a person who gives his or her consent to repay the loan in case the primary borrower is unable to do so. 

While the lender is common in all loans, but it is important to note that there can be two parties on the borrower’s side. There may be a chance that despite being only the co-signer, the complete ownership of the loan lies on your shoulders. In such a case, you could be solely responsible for repaying the loan and may end up as the only party in debt. This can have an adverse effect on your personal credit score for future loans. To avoid this, you must understand the loan structure and ensure that you are involved only as a co-signer and not the primary borrower.  

Beware of all terms and conditions

The next important thing to consider and understand is the promissory note. You must read through all the important definitions, clauses, and terms and conditions. 

Ideally, it is essential to check for the following:

1. Triggers that may end up in default.
2. Any flexibility in terms of repayment of the loan.
3. Any separate provision in case of disability or demise of the primary borrower.

Before you sign the loan document, make sure you are well aware of all the provisions and mandates mentioned under the note. 

Pre-plan for a co-signer release

As a co-signer, you would not want the loan to impact your credit score for the next 10 or 15 years to come. Once you are sure of the primary borrower’s financial stability and can prove it with documents, you can and must apply for a co-signer release. The two most vital factors that need to be considered before doing so are: 

1. There should be a considerable improvement in the credit score of the primary borrower.
2. The instalment payments should have been made in time for a minimum period of 2 years by the primary borrower. Although this span is not mandatory, lenders generally wait for two years to ensure that there is a consistency in repayments. 

However, getting a co-signer release may be a tedious task as very few of these applications turn successful. To ensure a better chance of release, you can try applying for a release once the primary borrower can show a credible income source to repay the loan single-handedly. 

Do not fall for low-interest rates

Student loans generally last for 10 to 15 years which is a substantial time to settle the loan. Several lenders in the market may be willing to offer you an education loan with a lucrative scheme in place. However, before you co-sign a student loan, make sure you have explored all the available options at hand. 

Falling for a low-interest rate may not always be the best strategy, and you must consider all aspects of a loan cumulatively. Private lenders offer interest rates that are low during the first few years of the tenure but tend to increase as time passes. Since the tenor of a student loan is quite long, loan providers sometimes place several factors like market volatility, inflation, price fluctuations, etc. to increase the rate of interest. 

Apart from private lenders, it’s essential to also consult banks. Several banks offer student loans at fixed interest rates. You should also evaluate lending options by credit unions and states who can offer a better quote for interest rates. 

Understand the risk if the primary borrower does not pay on time

Many a time, primary borrowers are not able to pay the entire loan. As a co-signer, you may not always be aware of these loan defaults. The lender’s side too is under no obligation to inform you of such problems in the payments. This can put your finances at stake. 

Since you are the co-signer, it would also mean that you are responsible for repaying the entire loan to the lender. In addition to this, the delay in paying the loan will also be reflected in your credit report. This can make it difficult to get a loan in the future for your own needs.

Consider other available options before applying for a loan

As a parent or guardian, it is your rightful duty to ensure that before you co-sign a loan, you have exhausted the benefits from all the available options at hand. Federal aid is one of the best ways to help your children pursue higher education. Even if your child has exhausted his or her limits, there is a provision for the parents to avail a loan under the Parent PLUS category. Although for a Parent PLUS loan, you will be the primary borrower, the repayment options are still quite flexible as compared to other options. In addition to this, you may find the overall costs involved in a Parent PLUS loan more affordable than private loans. 

To sum it up

Co-signing a student loan may be the need of the hour but before you do it, make sure that you explore all other options and understand its future implications. If you have decided to co-sign a loan, try to find a low rate of interest and flexible repayment options. 

Since these loans pose a direct impact on your credit report, you can also consult a financial advisor before making any decision.