Student Loans May Accept Co-signers, but Be Careful
Francine L. HuffLoanBiz Columnist
When is it a good
idea to co-sign for a student loan? Never, say many financial experts. Despite
that advice, many people decide to take the plunge and co-sign for a family
member or friend in an effort to help them pay for an education. But co-signing for any loan is serious
business, and here's what people need to know about how doing so can affect
their financial future.
Who Is Really Responsible?
Many times people with no credit or bad credit will ask someone to co-sign for a student loan. By co-signing for a private student loan, a person is in effect saying that they will be responsible for paying back the money if the borrower doesn't. This is a huge responsibility that should not be taken lightly since many students come out of school owing tens of thousands of dollars in debt. Four questions anyone considering co-signing for a loan should ask are:
- Is the borrower generally responsible with his or her finances?
- Does the borrower already carry a lot of debt?
- Does the borrower frequently miss making payments on his or her bills?
- Is the
borrower someone expected to be in your life for the long-term?
Who Benefits from
Arrangement?
In general, the only person who really benefits from a
co-signing arrangement is the borrower. If the person has bad credit and is
having trouble qualifying for a student loan, having a co-signer may give him
the boost he needs for approval. Having a co-signer can also result in a better
interest rate on a private student loan. Many parents co-sign for their kids to
help them out, but even those arrangements should be weighed carefully.
What is the Effect on Credit Rating?
For the co-signer, the drawbacks to such an arrangement are
sobering. If the borrower doesn't pay back the student loan, not only can co-signers'
credit ratings be affected, but they also can be sued for the amount of the loan
plus interest. Collection agencies may harass co-signers to obtain payments if
they think chances are better of recovering money from co-signers than the
borrower. A co-signed private student loan can also come back to haunt a person
later on when they try to apply for a mortgage or other loan since lenders may
include the amount when calculating their debt-to-income ratio.
People who do decide to co-sign for a student loan should
make sure they get a copy of all the paperwork.
Federal law requires that co-signers receive a document explaining their
obligations.
And finally, if the borrower makes the payments, but makes
them late, the late payments can appear on the co-signer's credit report, lower
credit scores, and make borrowing more costly.
Sources
MSN.Money
"Why you should never co-sign a loan," by Mary
Rowland, www.moneycentral.msn.com.
SallieMae
About the Author
Francine L. Huff is a freelance journalist and the author of The 25-Day Money Makeover for Women. She has appeared on a variety of TV and radio shows.
