4 Things To Know Before Co-Signing a Loan for Your Student
Written by
Chris Adam
Edited by
Rebekah Evans
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On the surface, it can seem like a great way to support someone important to you. Co-signing a loan for your student may be your way of giving them a financial boost.
But before you agree to do that, there are some essential things to keep in mind. If not, you may find yourself in a financial situation you never expected — and may not easily be able to fix.
GOBankingRates talked to some financial and legal experts to find out four things to know before you co-sign that loan.
The Legal Implications
Benson Varghese, the founder and managing partner of Varghese Summersett, said he’s worked with dozens of parents and grandparents who co-signed loans, especially student loans and had no idea about the legal implications.
“As a board-certified criminal lawyer, I’ve seen how financial missteps spill over into other areas, including lawsuits, garnishments and even credit-based denials that affect housing and employment,” Varghese said. “Over the last five years, I’ve helped more than 150 families unwind loan situations gone sideways and what stands out most is how many never got proper legal advice before signing.”
The Responsibility
Andrew Lokenauth, money expert and owner of BeFluentInFinance, said one key thing to remember is that you’re 100% on the hook for that debt.
“A lot of people don’t realize this, but I’ve seen countless cases where parents thought they were just helping out and ended up responsible for massive payments,” he said.
Lokenauth learned some of this the hard way. When his nephew lost a job in September, the lender called Lokenauth first.
The Credit Problem
Speaking of lessons learned, Lokenauth pointed out how co-signing a loan for a student can hurt your own finances.
“The impact on your credit score is huge,” Lokenauth added. “My credit took a 30-point hit just from the initial cosigning and that loan shows up on my credit report just like it’s my own debt — because technically, it is. This affects everything from my debt-to-income ratio to my ability to qualify for other loans.”
The Exit Options
It may be tougher than you think to get out of that loan agreement. Many loans don’t offer co-signer release.
“You may be tied to that loan until it’s paid in full,” said Christopher Stroup, founder and president at Silicon Beach Financial. “This is why it’s always important to read the fine print.”
Most importantly, Lokenauth said to go in to the co-signing situation with your eyes wide open.
“Make sure you can afford to take over the payments if needed, because there’s a decent chance you might have to,” he said. “My rule of thumb: Don’t co-sign unless you can afford to gift that amount of money.”
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