3 Things You Need to Know About Cosigning a Loan

3 Things You Need to Know About Cosigning a Loan

It's harder for student borrowers who have limited credit history to obtain a private student loan without a cosigner. Last year, nearly 94 percent of private, undergraduate student loans included a cosigner, according to MeasureOne, a data company that tracks student loans.

At first glance, cosigning seems like a simple way to help your student pay for college and may also result in a better interest rate for the student.

Who can cosign a student loan?

The student's parents, grandparents, relatives or family friends will typically cosign, although almost anyone can be a cosigner as long as they meet the lender's eligibility requirements. As a cosigner you have a vested interest in the student's educational success, so you should know the student well. You should also be comfortable discussing finances with them.

What are the cosigner's responsibilities?

As the cosigner of the loan, you're equally responsible for the full amount borrowed by the student. Even if you've agreed that he or she will make all or some of the payments, in the lender's eyes, you're equally liable. If at some point your student doesn't or can't meet the loan obligation, a lender will expect you to make payments.

But before signing on the dotted line, here are 3 things you should consider before cosigning a student loan:

1. How much you can afford to borrow

In general you don't want to borrow more for your student's education than you can afford to pay back before you retire. If you have a lot of other debt, have several students that need assistance with their loans, or are behind on your own retirement savings, you may not be able to help as much as you'd like.

2. How it will impact your credit

The cosigned loan amount will become part of the total debt that the lenders look at when deciding whether you qualify for additional loans or credit. Even if all loan payments are current, a high balance could impact your ability to qualify for a future loan or prevent you from qualifying for the lowest interest rate.

Payment history is one of many factors that go into determining your credit score, so if your student misses a loan payment, your credit score may be affected.

3. How you'll handle things if your student stops paying

While 98 percent of today's outstanding private student loans are current according to the Consumer Bankers Association, if your student does stop repaying the loan, you'll need to take over the remaining payments. Before you agree to be a cosigner consider how that situation will affect your relationship with your student.

Talking through a worst case scenario well ahead of time may help both of you feel more comfortable with the arrangement. Set aside time to have a focused discussion about financial responsibility. Determine how your student intends to pay back their loan, whether they expect a financial contribution from you and what access you will have to the loan documentation and account history. Setting expectations from the start can help you avoid financial and emotional stress down the line.