Cosigning a Student Loan: All you need to Know about the Pros and Cons

Cosigning a Student Loan: With the increase in economic instability which has affected the income of many parents across the country and the world in general, getting a loan as a student to fund one’s education and academic pursuit has become the order of the day in our contemporary society.

There are different types of loan one can take, but there is a specific kind of loan given to students or researchers for academic purpose, it is called ‘student loan’. To a large extent, to facilitate the process of getting this loan, sometimes one needs a cosigner.

All you need to Know about the Pros and Cons of Cosigning Student Loan

It is important we understand some terms used here so as to create a better understanding of why you have to carry out an evaluation before cosigning a loan for a student. We shall consider what is loan, what is student loan, who is a cosigner and what cosigning means.

What is Loan?

A loan is a money lend to a person; or the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations etc.

What is a Student Loan?

It is a type of loan designed to help students pay for post-secondary education and the associated fees, such as tuition, books and supplies, and living expenses.

It differs from other types of loans in the fact that the interest rate may be substantially lower and the repayment schedule may be deferred while the student is still in school.

It also differs in many countries in the strict laws regulating renegotiating and bankruptcy. This article highlights the differences of the student loan system in several major countries.

What Does Cosign Mean?

To cosign is the act of signing cooperatively with a borrower for a loan. A cosigner serves as an additional repayment source for the primary borrower. A cosigner can help a borrower to obtain loan terms that they may have otherwise been unable to be approved for.

A cosigner can also help the borrower to increase the amount of principal that they can receive.

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Who is a Cosigner?

A cosigner is someone who applies for a loan with another person, and legally agrees to pay off their debt if they are not able to make the payments.

The most common reason to use a cosigner is if someone is struggling to get approved for a loan based on their credit score, income or existing debt.

A cosigner differs from a co-borrower in that the cosigner does not receive the principal on the loan, nor does the cosigner have to make regular monthly payments.

What does it mean to Cosign?

Cosigning is often an option that lenders will allow for a variety of different types of loans. It is considered as a type of joint credit which is associated with either a cosigner or co-borrowing agreement.

Who Can Cosign a Loan?

We often think of a cosigner as a parent. However, a relative or other credit worthy individual can also cosign a private student loan. In fact, we find that almost 30 percent of smart option student loan cosigners are someone other than the borrower’s parent

Also, a cosigner could be a friend, family member or anyone close to you who has a strong credit score and a consistent income.

Importance (Pros) of Cosigning or a Cosigner

Cosigning can be a benefit for borrowers with low income or minimal credit history. Adding a cosigner can also improve the terms on a loan or increase the principal that a borrower is approved for.

In a credit application with a cosigner, a lender will require information on both the cosigner and the primary borrower. Both individuals will have to provide personal information that allows the lender to do a credit check.

The underwriting decision and terms on a cosigned loan will be based on the profiles of both the cosigner and the borrower. If a loan is approved with a cosigner then standard procedures will apply.

Using a cosigner makes sense (and is very common) for close family members in certain situations. You can purchases a new home by putting your spouse down as the cosigner, because both of you are equally responsible for the investment.

Cosigning also makes sense if someone is getting back on their feet. Someone who previously lost their job but needs a car to travel to interviews might use a cosigner to take out an auto loan.

The Risks and Disadvantages (Cons) of being a Cosigner

The Risks and Disadvantages (Cons) of being a Cosigner

Below are six (6) reasons why you should think twice before cosigning a loan;

·         Cosigning a Loan Is High Risk, Low Reward

You might cosign on a loan for a car you are not driving or a mortgage for a house you do not live in, but that does not change your liability. Your credit score benefits only slightly from the monthly payments.

When cosigning a loan, you take on all the risk if the loan is not repaid but may only see a modest improvement to your credit score.

·         The Lender will Sue you First if Payments are not Made

While it might seem strange that the lender would look to you, think about it for a moment from their perspective. It is true that you may not have borrowed the money, but by cosigning a loan, you enable the person who defaulted to get the loan in the first place.

Whether you are a cosigner for a car or a mortgage, it takes two to tango and the lender can try to sue you if payments are not made.

·         The Person you help will be Happy, but you will have a lot to Lose if He or She does not Pay back the Loan

Your signature might make the other person happy because you helped him or her out. But that excitement does not last forever. Even worse, the person who you helped may have bad credit.

So they may not be as concerned about whether another negative mark appears on their credit report. Needless to say, you have much more to lose.

·         Cosigning a Loan can Destroy Friendships and Families

Not surprising when you think about all the time and energy you could spend ensuring the other party keeps up with their payments. This due diligence can take its toll on a friendship and, as the cosigner; your desire not to suffer any negative impacts could be construed as mistrust.

And, if they fail to make any payments, that can have a profound impact on your finances and further fuel the fires.

Remember, one missed or late payment could mean a black mark on your credit. You may not be very willing to forgive or forget, and that can definitely destroy a friendship or strain family ties.

·         You are 100% Liable on a Loan that could be a Significant Amount

Cosigning a loan makes you liable to pay for the entire balance should the guilty party fail to pay. Some lenders are not interested in having you pay half of the loan. This means that you will have to work it out with the other party or get stuck paying off the entire balance.

·         You Could Face Tax Consequences from Cosigning a Loan if the Debt Is Settled

The lender might not want to go through the trouble of suing you and instead agree to settle the balance owed. That will mean you could have tax liability for the difference.

For example, if you owe $10,000 and settle for $4,000, you may have to report the other $6,000 as debt forgiveness income on your tax returns.

Also, settling on the account will leave a negative mark on your credit report. The account does not state paid as agreed, but rather, settled. Your score suffers because of that new mark.

Alternatives to Cosigning

If you are unable to find a willing cosigner, or want to avoid the risks associated with cosigning, there are several alternatives that can help you get the money you need:

  • Increase your down payment
  • Build your credit.
  • Offer collateral.

In a Nutshell

From the foregoing, considering the above discussion on the pros and cons of cosigning a student loan, it is apparent that a careful examination of the borrower should be carried out before cosigning the loan to avoid been a victim.

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