What to know before co-signing on a student loan
By Allie Johnson
June 8, 2015
If you're planning to co-sign on a student loan, think twice.
Signing on the dotted line might help your kid pay for college, but it can stress you out, wreck your credit and even land you in court.
Of course, co-signing isn't always a bad thing, especially if you have no other options. But anyone considering co-signing for a student should learn the ins and outs — and think through the worst-case scenarios.
What you should know
You're responsible for repayment. Ideally, your kid will graduate, get a dream job and make every payment on time. However, if the borrower does miss a payment, stops paying altogether or runs off to join the Peace Corps, you're 100 percent responsible for coughing up the money. “Don't fool yourself into thinking that co-signing makes you less of a borrower,” says Heather Jarvis, an attorney and student loan expert who answers student loan questions at AskHeatherJarvis.com.
Co-signing can wreck your credit. If the borrower misses even one payment, your credit can suffer. One mom, Richmond, Virginia, business owner Debra Ruh, says that's what happened when her husband, Edward, co-signed on their son Kevin's student loan. Kevin, now 26, couldn't find a job in his field, was working as a pizza cook and fell behind on payments.
The Ruhs got collection calls “every 15 minutes” and Edward's pristine 800-plus credit score got dinged, Debra says. “He always took real pride in his credit rating,” she says. She and her husband now pay half of the $400 monthly payment.
The loan could come due in full. If the loan goes into default, you might suddenly owe the total amount at once, Jarvis says. The terms of the loans vary, but one missed payment could trigger default in some cases.
“Usually they demand a large lump sum payment,” says Jarvis, adding that the lender may also tack on collection costs and fees. If you don't pay up, the bank might sue you; in fact, it's more likely to sue the co-signer than the student borrower, Jarvis says, because they know they have a better shot at collecting from you.
There might be no way out. Student loans are nearly impossible to get out of — for example, neither federal nor private student loans can be discharged in bankruptcy — and some lenders — though not all — even demand the co-signer pay in full right away if the borrower dies.
“But that's not always or generally the case,” Jarvis says.
Alternatives to co-signing
If you're leery of co-signing — or simply can't afford it — look into your other options, recommends Bruce McClary, vice president of public relations and external affairs for the National Foundation for Credit Counseling, which has a new student loan counseling program.
For example, he says, look into grants and work-study programs. “You want to limit the amount you borrow as much as possible,” he says.
Even taking out a loan yourself might be a better option than co-signing, Jarvis says. For example, some parents take out federal parent PLUS loans or even home equity loans to help put their child through college, Jarvis says. “You have more control when you're the primary borrower,” she says.
If you go that route, you could ask your child to pay part of that loan payment, says Kathryn Randolph, a contributing editor to FinAid, a site that offers advice on student financial aid.
If you co-sign: What to do first
Co-signing isn't always a bad choice. Co-signing can sometimes work well for families who have exhausted all other options, such as federal loans and grants, says Jarvis. Private, but not federal, student loans often require co-signers, she says.
Additionally, it can help the student borrower to build credit if all payments are made on time, Jarvis says.
If you do decide to co-sign, shop around for the best loan. Take a close look at the terms, including:
- Interest rate. What is the interest rate, and is it fixed or variable? “If it's variable, it's likely to go up over time,” Jarvis says.
- Payment amount. Find out exactly how much the borrower will have to pay each month after graduation and try to figure out if the student borrower — or you — will be able afford to make that payment, McClary says, adding that this will require some guesswork about the type of job and salary the grad will get.
- Repayment options. Check to see if there's any flexibility in repayment or any provision for a borrower who's struggling. And see if the loan can be discharged if the student borrower dies or becomes disabled, Jarvis says.
- A co-signer release. Some loans do offer co-signer release provisions in certain cases, such as if the student borrower makes a certain number of on-time payments, Jarvis says. However, the release usually doesn't happen automatically, so you have to know about it and request it, she says.
“Go into it with your eyes open, and realize that co-signing is an investment — and a risk,” Jarvis says.