Things to Know Before You Co-Sign a Student Loan

Michael Lux Best Of, Blog, Student Loans 13 Comments

Before you even consider co-signing a loan, it is important to understand the obligation that you are making. Most people realize that if the person you cosign for doesn’t pay the loan that you’ll be on the hook.  However, few people realize the additional consequences of cosigning a loan.

Your Creditworthiness

Did you know that if you co-signed a loan it shows up on your credit report?  While your credit report will note that you are the co-signer on the loan, it will still include the debt in your total debt.  This could have major consequences if you are looking to buy a home.

When Tragedy Strikes

What if the person you cosign for dies?  Sadly, many private lenders do not discharge the student loan if the student dies.  Despite efforts to make this practice illegal, the law has not changed.  If you are considering co-signer for anyone be sure to read the fine print for what happens in the event of an untimely death.  Today many families have to relive the death of a loved one on a monthly basis due to the student loan bills living on after the death of the borrower.

What happens if the borrower become permanently disabled?  This is yet another issue to be on the lookout for.  Banks and lenders are focused on their bottom line.  If the borrower cannot pay, they will find a way to go after the co-signer.  Before you agree to co-sign any loan, make sure there are provisions in place in case of tragedy.

Special Student Loan Rules

If you are a going to co-sign, it is critical to understand that student loans are different than other types of debt.  Unlike mortgage or credit card payments, if you fall behind on student loan payments, bankruptcy isn’t likely an option.  When the primary borrowers fail to pay back a loan, lenders have gone as far as garnishing the social security checks of the grandparents.

You should also keep in mind that the student loan must be paid back under any circumstance.  If the borrower doesn’t graduate, it doesn’t matter, the loan still must be paid.  If their is a falling out between the borrower and the co-signer, it doesn’t matter.  Once that paperwork is signed, the co-signer cannot just walk away on their own accord.

Removing a co-signer

There are basically two ways in which a co-signer can be “removed” from a student loan.  Neither of them are particularly easy.

The first way would be to get the lender to voluntarily release the co-signer.  This is a decision that is entirely at the discretion of the lender.  For example, Sallie Mae is willing to release a co-signer if the borrower has made 12 consecutive on time monthly payments (principal and interest) AND the borrower now is independently creditworthy.  This means that before Sallie Mae will release the co-signer, the borrower must have a decent income relative to their debt AND a decent credit score.  They don’t make it easy.

The other way would be for the borrower to consolidate their loans.  If the new consolidated loan pays off all the existing loans and a co-signer is not needed, the co-signers obligation will be complete because the loan they were willing to assume liability for will have been paid off.  Here again, the borrower must have good credit and income to consolidate on their own.

Who should co-sign?

Ideally nobody.  A co-signer should never get involved until the borrower has maximized their scholarship, grant, and federal loan opportunities.  Taking out a large private loan to pay for the majority of tuition is generally not advisable.  However, if there is a little gap between the funds you have and the funds you need, a private loan can be helpful.

The co-signer obviously needs to be someone with a close personal relationship to the borrower and someone with good credit.  If you are not close to the borrower, the borrower will be less concerned if you get stuck with the loan.  If you don’t have good credit, the borrower gains nothing by you co-signing the loan.  The co-signer should also be capable of making payments on the loan.  If at any point, the borrower cannot pay, the co-signer needs to be ready, or else their good credit will go bad in a hurry.

Finally, someone who is about to get a big loan, such as a home loan or a business loan, is not a good candidate to co-sign a loan.  Waiting until after the large transactions are completed can be the difference between getting or not getting the mortgage.

Ways to avoid co-signing the loan

The first and most obvious way would be to just refuse.  If you are a parent, your refusal could made a huge difference in the life of your child.  If it forces them to go to a less expensive school, you could be saving them hundreds of thousands of dollars over the course of their life.  Saying no is never easy, especially when it is somebody talking about their college dream, but sometimes a no is the best thing for everyone involved.

Find an alternative source of funds.  If you have good credit you may be able to get a home equity loan or an unsecured personal loan.  The terms and interest rates of these loans are much different than those of a student loan.  Depending on the type of loan, you could have different tax consequences and you may get a lower rate or better terms.  Best yet, there are more consumer protections with these loans than on a student loan.

Readers:  Have you ever been on a loan with a cosigner?  What advice would you offer to someone making the decision whether or not to co-sign?

  • Great post. We’re so grateful my father in law was able to co-sign some of my husband’s loans to get a better interest rate.

    • Thanks Cat! For the borrower having a co-signer definitely makes a big difference. Having someone like that can save a lot on interest.

  • I’d never considered what would happen if the cosignee passed away. I never had to get anybody to cosign my loans; mine were private loans, though, so that made a big difference.

    • It is definitely important to be aware of. Some lenders, including the federal government, will discharge the loan. Unfortunately, not all of them will.

  • I’ve never seen a situation where it was a good idea to co-sign a loan. Ever.

    • I think it’s something you should be careful about but I wouldn’t say never. My parents co-signed loans for me and I don’t think they have any regrets. It certainly made a huge difference for me. In my opinion the critical thing about co-signing is making sure everyone involved knows the consequences. That reduces the risk of an unhappy surprise.

  • I had no idea that the co-signer would still be responisible for the loans if the student died. That’s terrible on so many levels. I guess it really is all about the money for some private lenders.

    • It is sad that the co-signer could be responsible. Fortunately, they are not with federal loans and only certain private lenders follow this terrible practice.

  • Great info! Co-signing a loan is serious business, I would only consider it in very special circumstances. And given the info above, I’ll be very careful about those “what if” scenarios and reading the fine print.

    • I think that is exactly the approach that most people should use when it comes to co-signing for student loans. It is easy to fall into the trap that they are all pretty much the same, but these loans are not all created equal. Reading the fine print is a must!

  • I’ve always been a bit dumbfounded why they changed the law to make all types of student loans ineligible for bankruptcy. I mean, I understand not allowing federal loans to be discharged, but why do private student loans get protection nowadays? So a person can be frivolously carefree and run up a huge credit card debt and then get rid of that obligation in bankruptcy. However, a student who ends up with large educational loans to better himself and then ends up not earning anywhere near enough to pay off the loans in a reasonable amount of time is forever stuck with them. Doesn’t seem right.

    • I couldn’t agree more. I think the reason it happened is that banks and lenders stood to gain a ton of money by the change an they exerted sufficient lobbying power to get it done. Unsuspecting students really had little say in the whole thing.

  • Derek Barlow