Cosigning a student loan is a significant commitment that shouldn’t be taken lightly. That’s why it’s crucial to carefully consider the long-term implications, and you should only do so if you trust the primary borrower and are fully aware of the potential financial risks.
“Cosigning a student loan is no small gesture,” said Dennis Shirshikov, financial expert and head of growth at Awning. “It’s a binding promise that holds you legally accountable for repaying the loan if the primary borrower fails to do so.
This responsibility doesn’t just hover in the background either. Shirshikov added that it’s actively reported on your credit history, affecting your debt-to-income ratio and potentially your ability to obtain further credit.
Being informed before taking on this responsibility will guarantee you make the best decision going forward. Below is some advice from experts on how to navigate the cosigning process.
What Are My Responsibilities?
According to experts, having a cosigner can enhance a student’s loan approval odds. The credit history of both the student and the cosigner is checked, possibly leading to a better interest rate.
“However, this can be challenging for family members since backing someone else’s loan comes with significant risks,” noted Jonathan Merry, finance and credit expert at Moneyzine. “Many feel safe when they cosign, but signing is equivalent to taking the loan on yourself. This means the loan appears on your credit report.”
When it comes to cosigner responsibilities, most people think they kick in if the borrower doesn’t make payments, explained Michael Lux, attorney and founder of The Student Loan Sherpa. “In reality, cosigners deal with the consequences of cosigning from day one.”
A cosigned loan shows up on your credit report, which can impact everything from a mortgage application to a car loan, Lux said. “The more debt you cosign, the more significant the impact — even if the borrower never misses a payment.”
If the student doesn’t pay, then your credit score suffers directly. A single skipped payment can lead to a loan default, requiring immediate full payment.
How Do I Protect My Credit?
“To protect yourself, first and foremost, you have to understand the terms,” said Lux. This means thoroughly reading the promissory note both you and the student sign for the loan.
“Be clear about what causes a default and if there’s any payment flexibility,” he added. Also, determine if the loan has a death or disability discharge. “More providers now offer this, but without it, the cosigner must pay if the student dies or becomes unable to pay due to disability.”
Lux also recommended asking for a cosigner release clause, even if it’s unlikely to be approved. “Some lenders can offer this. After consistent payments for about two years, or when the student reaches a certain credit score, you may be able to remove your name.”
This can also shield the student if the cosigner passes away or declares bankruptcy, because the loan defaults immediately and full payment is often demanded. The release can avert this, but it’s not automatic.
Experts advise setting yourself up for success from the start. “Constant communication is key here,” said Shirshikov. Ensure you have access to the loan account details, set up alerts for payments, and maintain open lines of communication with the borrower. “I often say, treat it as if it’s your loan, because, essentially, it is.”
“Ultimately, there is no way for a cosigner to 100% protect their credit,” said Leslie Tayne, a debt settlement attorney in New York City. “Due to the nature of cosigning, there is always some inherent risk. That means you should be well aware of your responsibilities as a cosigner and ensure you’re fully comfortable with the risks before agreeing to this type of arrangement.”
What Do I Do If I Can’t Make Payments?
“If the borrower fails to make payments and the lender tries to collect from the cosigner, the cosigner options are quite limited,” said Lux. “They are legally responsible to repay the debt, and they are at the mercy of the original loan contract and the lender.” He noted that in some cases, lenders will agree to a modified repayment schedule, but if the lender can’t accommodate the cosigner’s needs, the cosigner will face negative credit reporting and potential wage garnishment.
Being in a position where you can’t make payments can be scary, but it’s essential to be proactive, experts say. “If you find yourself in a pinch, it’s crucial to not stay silent,” Shirshikov advised. “Contact the lender immediately; many offer deferment, forbearance, or restructuring options, especially for student loans.” He explained that selling assets, tapping into savings, or taking a part-time job might also be necessary.
What Happens If the Loan Defaults?
“Defaulting is a serious matter,” warned Shirshikov, who said this can lead to diverse repercussions. “The lender can seek payment from you, send the account to collections, or even file a lawsuit.” Your credit will also suffer, possibly leading to higher interest rates on future loans or difficulty renting or buying a home.
“I’ve seen situations where individuals had to make significant lifestyle changes after a loan default,” Shirshikov recalled. “One client, after facing this challenge, turned it around by dedicating themselves to financial education, even attending some of my university lectures. They worked out a payment plan with the collections agency and slowly rebuilt their credit. It was a long journey, but their perseverance was inspiring.”
To avoid this possibility, Tayne said it’s a good idea to sit down with the primary borrower beforehand and have a conversation about what their finances look like and what their plan is for repaying the debt.
While defaulting is hard to go through, Shirshikov noted that in all these scenarios, what’s evident is the importance of clear communication, proactive management, and continual education on financial matters. “It’s not just about protecting your credit,” he said. “It’s about safeguarding your future financial stability and peace of mind.”
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