Shortly after finishing college, I received a call from my brother, who needed a cosigner for some student loans.
At the time, I didn’t give much thought to the consequences of consigning. I didn’t weigh the risks.
In my mind, it was an easy decision. Someone I cared about needed help, and all I had to do was sign my name so they could get help. Easy call.
I’m happy to report that things went perfectly. However, even in the best-case scenario, cosigning causes hardships.
When Cosigning Goes Right
My brother was a model borrower.
Shortly after consigning the loan, he bought me a thoughtful gift to say thank you for the help.
The loan he needed was relatively small and managable.
After finishing college, even during hard times, he always made sure his student loan bills got paid.
When the opportunity arose to remove me from the loan, he did it.
I never received a call from the lender about a late payment. We never had an awkward discussion about how his financial decisions impacted me. I never had to step in to make a payment.
It was a by-the-book, perfect cosigner experience.
Luck is Part of the Equation
My brother is responsible and a hard worker. When I cosigned his loans, he had nearly completed his degree.
From a risk-management perspective, consigning for him was relatively low-risk.
However, even in ideal circumstances, a little bit of luck is required.
There is a long list of things that could have gone wrong:
- Health – If my brother got sick during school or after school, it could have made getting a degree and repaying the debt very difficult.
- Job Market – There are plenty of smart and hard-working people unable to find a job after school. Sometimes people loose their jobs unexpectedly. Steady long-term employment isn’t guarenteed for anyone.
- Financial Emergencies – Student loan repayment becomes very difficult if you have a sick child, get a divorce, or are impacted by a natural disaster.
Had my brother faced a severe hardship, my cosigner responsibilities would have kicked in. I’d either have to make payments on his behalf or pester him to ensure the lender got paid despite his hardship.
It is certainly possible to take steps to make sure consigning goes well. However, luck will always be part of the equation. Thus, any cosigner should have a plan if the unexpected or unavoidable happens.
Why Cosigning is Always a Hassle
Even when things go perfectly, there is a downside to consigning.
When I wanted to buy a house, my brother’s student loans appeared on my credit report. In my case, it meant a smaller mortgage. For some cosigners, it may be hard to get a mortgage at all.
Some mortgage lenders are willing to exclude the cosigned debt from the Debt to Income ratio calculations on a mortgage application. However, getting this exception requires additional paperwork, and the borrower must prove they made payments on time, for a least a year, with no outside help.
In short, it was a hassle.
Tips for Borrowers with Cosigners
- Pick the right school and the right degree. If you ask someone to cosign a student loan, make sure it is a good investment. Don’t spend a ton of money on a degree that doesn’t justify the price. Overpaying for an education will make things diffiuclt for you and your cosigner.
- Make smart borrowing choices. Not all student loans are created equal. Find a loan with reasonable repayment terms and the lowest interest rate possible. This usually requires shopping around, but it will make life easier for you and your cosigner.
- Keep the lines of communication open. If you are struggling, let your cosigner know right away. They may even be able to help. If you miss a payment, your cosigner can either hear it directly from you or from a lender collection call. Cosigners don’t want unexpected calls from lenders.
- Say thanks. Your cosigner went out on a limb for you. They don’t benefit from cosigning in any way. A small gesture to show you understand and appreciate the risk they took is a good idea.
- Remove your cosigner from the loan when possible. Some lenders advertise cosigner release programs but qualifying is often a challenge. Fortunately, there are alternative strategies for cosigner release that are more effective. For example, you can refinance the student loans in your own name.
