Over the years, I have gotten many heartbreaking emails from readers. Frequently, these emails come from student loan cosigners who feared they made a mistake.
At its core, cosigning is a selfless decision. The cosigner receives no benefit, takes on tremendous risk, and helps a loved one afford college.
Sadly, the seemingly noble decision to cosign is often a mistake for both the cosigner and the borrower.
The Obvious Problem: Getting Stuck Making Payments
Some cosigners think they are just providing a recommendation or endorsement of the borrower as being a responsible person.
In reality, they are legally committing themselves to pay off the loan if the borrower is unable.
There is an endless list of reasons the cosigner could get stuck making payments.
Cosigners could face a major financial hardship if the borrower:
- can’t find a job,
- doesn’t earn enough to make payments,
- chooses to stop making payments,
- gets sick, or
What Happens to Cosigned Loans if the Borrower Dies?In some cases, the lender will forgive the remaining debt when a primary borrower dies. Others will require the cosigner to take over the monthly payments. Some loans even have a clause requiring the balance paid in full upon the borrower’s death. Cosigners should investigate loan terms and get a life insurance policy when necessary.
Credit Score Consequences
Cosigning is often a mistake because of the damage it can do to a credit report.
To become a cosigner, the lender will run a credit check. This hard credit pull can hurt the cosigner’s credit score. While the drop in score is usually small and doesn’t last long, it can cause an issue for cosigners trying to get a mortgage.
However, the big credit score risk comes in the form of late payments.
A single missed payment can last on your credit report for seven years. This delinquency will appear on both the borrowers and the cosigner’s credit report.
A missed payment can happen for any number of reasons. The borrower may think they are signed up for automatic payments, but there is a mistake in enrollment. The loan might get sold from one lender to another, and the borrower misses a payment because they didn’t know where to send it.
Usually, both the borrower and the cosigner receive notice and an opportunity to make things right before the negative reporting happens. However, this isn’t guaranteed.
Tension with Family or Friends
A cosigner depends upon the borrower making responsible financial decisions.
Lenders like having cosigners because it gives them an extra debt collector. If the borrower struggles, the cosigner will have a huge incentive to get the borrower to make payments.
Imagine being a cosigner and seeing the borrower buy a new car but then missing a student loan payment. Imagine being a borrower and having a cosigner ask personal financial questions to ensure you can keep up on payments.
The borrower/cosigner relationship can fall apart when money enters the equation. At the point the borrower stops making payments, things can get really ugly.
Debt-to-Income Issues for Cosigners
Cosigning a student loan is a mistake because of the many ways things can go wrong.
However, cosigning can also be a mistake when everything goes right.
Cosigned student loans show up on the cosigner’s credit report, even when the borrower is making payments. The problem with the loan showing up on a credit report is that it impacts the cosigner’s debt-to-income ratio.
There are ways to work around this particular issue in some circumstances. However, for anyone looking to buy a house, cosigning student loans can be a major problem.
Cosigner Release Programs:Many lenders like Navient offer a cosigner release, but actually qualifying for the release can be a major challenge. Those who have already cosigned student loans should investigate how to, directly and indirectly, get released from the student loan.
Cosigning a Student Loan is a Mistake When Federal Loans are Available
Cosigning a student loan is typically a mistake for reasons that apply to the cosigner.
When federal loans are available, getting a cosigner is a huge mistake for the borrower.
The analysis here is fairly simple. Cosigning a student loan only comes up with private student loans. Federal student loans are much better loans, and they don’t require a cosigner.
Before cosigning any student loan, make sure the federal options have been exhausted.
The One Time Cosigning a Student Loan Isn’t a Mistake
Sometimes cosigning a loan seems like the only option. Sometimes people don’t realize it is a mistake until it has already happened.
Borrowers who have existing student loans may look to refinance their loans to get lower monthly payments or a better interest rate. If these borrowers cannot refinance the loan without a cosigner, it might be smart for existing cosigners to help again.
If a cosigner is already the debt, and refinancing helps the borrower keep up with payments, cosigning on a refinance loan could be a smart decision.