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Student Loans May Accept Co-signers, but Be Careful

Francine L. Huff
LoanBiz Columnist

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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:

  1. Is the borrower generally responsible with his or her finances?
  2. Does the borrower already carry a lot of debt?
  3. Does the borrower frequently miss making payments on his or her bills?
  4. 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.

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