5 Things Parents Should Know About Cosigning a Student Loan

Most students do not qualify to receive private students or other types of loans on their own. Therefore, you may be asked to cosign on your son or daughter’s loan application, and there are several things that you should know before agreeing to do so.

What Does It Mean To Be a Cosigner?

If you cosign on any type of loan document, you agree to make payments to the lender if the primary borrower fails to do so. Doing so provides the bank or credit union that is making the loan with a greater level of assurance that it will get its money back. According to a recent Ascent Funding blog, “cosigners need to meet specific credit related eligibility requirements, including sufficient income levels. In addition, to the credit hurdles, some prospective cosigners may be hesitant to risk their credit for your student loan. International students may face the challenge of finding a US citizen who’ll apply when it comes to finding a cosigner.”

The Loan Will Appear on Your Credit Report

It is important to understand that any student loan that you cosign for will appear on your credit report. This means that other lenders or interested parties will see the loan balance and repayment status when running a financial background check. Furthermore, any late or missed payments will likely have the same negative impact on your credit score as they would if you were the primary borrower.

Student Loans Generally Can’t Be Erased Through Bankruptcy

Unlike credit card or medical debts, student loan balances are rarely discharged through bankruptcy unless it would cause a financial hardship. However, even if private student loans with cosigner are discharged in a Chapter 7 proceeding, that ruling only applies to the primary borrower. As the cosigner, you are still responsible for making payments to the lender per the terms of the promissory note.

There Is No Guarantee That You’ll Be Released as a Cosigner

It isn’t uncommon for cosigners to be dropped from a loan after the primary borrower makes 12 or more consecutive timely payments. Alternatively, your son or daughter may ask that you be dropped from the loan at some point during the repayment period. However, you generally have no say as to whether or not this actually happens. In some cases, a lender may require you to remain as a cosigner until the balance is paid in full regardless of your child’s payment history or credit score.

You Could Be Jeopardizing Your Ability to Retire Comfortably

Private student lenders generally cannot take money out of retirement accounts to recoup the money that they are owed. However, if you make withdrawals from an IRA or 401(k) to pay bills or other expenses, a lender may be able to seize that money as soon as it enters your bank account.

Therefore, you might be faced with a scenario in which you can’t retire because you won’t be able to safely shield your funds from a student loan company. Alternatively, you might be left with less money to pay bills or expenses because a portion of your retirement savings is being garnished.

As a parent, you may feel responsible for covering some or all of the cost of obtaining a college degree. However, it is important to understand the potential consequences that come with putting your name on a private student loan repayment agreement.