Using student loans to help cover the costs of a college education can be a smart financial move, but it is not one that should be taken lightly. The decisions you make now about the amount of money that you are going to borrow based on future projections of your ability to repay your debt could have long-term financial implications for you and other family members. After you have exhausted all other forms of financial assistance and scholarships, though, taking out a loan can be your last resort.
Two types of student loans – federal and private
Federal student loans usually do not require a co-signer, but they do have some rigorous collection procedures as you must default on these loans after graduation. The federal government would garnish future revenues or even refuse federal income tax refunds to which you would otherwise be entitled.
Private student loans, on the other hand, usually don’t quite have this breadth in the collection of options, so they are more likely to need a co-signer of the loan. This is someone who has a better credit rating than the student does, and who agrees to be responsible for the repayment if the student does not repay the loan. Often it is a parent, grandparent, family member or close friend who agrees to take this risk.
What to think before Co-Signing
If you are asked to be a co-signer you want to think carefully before you agree to this. You certainly want the student to be able to go to college, but there is no guarantee for what happens on the road. Although many promises are sure to be made about responsibility, things can change very quickly after graduation. The student can loop-borrow and have more loans that can be easily repaid, the labor market might not be as promising as it once was, or the student might not be able to find a well-paid job quickly. Whatever the reason, he or she falls behind on payments and you suddenly start receiving collection announcements in your mailbox. Here are some things to consider before you agree to sign on the dotted line to help pay for a college education:
- You would be responsible for the entire loan: Of course, we all focus on positive and have the best intentions, but so many things can happen. Even if your student is responsible and gets a good job, he or she could get sick, have marital problems, in some sort of accident or even die. None of this would release you from your obligation to repay the private student loan. Talk about it with the student and with your own partner to ensure that you can afford to make these payments should the worst happen.
- It can affect your credit rating: You may need to borrow money for your own use in the coming years, and being a co-signer can make it difficult for you to take home or car loans at reasonable prices. Once the student loans begin to come in as a result, no late or missed payments on the part of the student could also think badly on your credit. Make sure the student has an understanding of the total amount of money being borrowed, how much must be repaid after the interest is calculated, what the total monthly payment will be and when the payments will begin.
- It could be difficult to get out of your obligation: Even if you think you have the flexibility to pay back the loan, if necessary, something unexpected would happen in your life. You might think you’re protected because the loan agreement has a release clause but read it carefully. It may not be possible to get released until the student has made a certain number of payments. Loans are often sold to third-party collection sources that might not agree with the release clause, and they could begin to come in after you for payment.
Advise your student to first count on the available federal, state and institutional financial assistance before you ask to co-sign on private student loans.