Co-signing for a college loan makes the debt your responsibility if the student borrower fails to uphold his end of the bargain. Student loans don't qualify for discharge through bankruptcy and may survive the death of the borrower. To avoid the kinds of problems that co-signers can face, it's best to stay out of other people's finances. Once you make that commitment, however, getting your name off the paperwork can be difficult, if not impossible.
Disagreements over money can fracture families and friendships. Blogs and Internet discussion boards abound with stories of relatives suing each other over defaulted student loans. A 2013 Accenture poll showed 41 percent of the previous two years' college graduates remained underemployed and 59 percent carried five-figure loan debt. When you co-sign a student loan, you may be focused on helping someone who's important to you realize his potential and build the academic foundation to qualify for a great future. Before you sign, however, give your own future as much thought as your would-be collegian's, because your financial prospects become tied to that loan just as the student's do. The debt shows up on your credit history and can affect your chances of qualifying to borrow money for yourself.
If a student borrower can't qualify for a private college loan and turns to you as a co-signer, the need for your financial participation points to the lender's lack of faith in the student's ability to carry the debt, based on his limited resources and credit history. Co-signing doesn't endorse his good intentions or demonstrate your faith in his future ability and willingness to pay. If he finds a great job after graduation and begins making more than enough to pay the loan you co-signed, he may qualify to refinance the debt solely in his name, but he'll have to show the lender that he presents a viable credit risk. His refinancing options also depend on the lender's terms. If he carries additional student debt, he may be able to consolidate his loans into one longer-term note in his name alone.
Some bank-backed student loan agreements allow a co-signer to qualify for release from the obligation after the student makes a specified number of consecutive on-time payments. That number varies depending on the issuer of the loan. These options may not become available until after the student graduates and exhausts a separation period, during which his payments cover only interest, not loan principal. If the loan comes through Sallie Mae, he must make 12 or 24 consecutive on-time payments after the separation period ends, depending on the type of loan, and demonstrate other forms of creditworthy behavior with a car loan or credit card. Other lenders offer student loans that require 24 or 36 timely payments before a co-signer can earn release from the obligation.
Federal student loans contain a cancellation clause that applies if tragedy strikes and the borrower dies. In that sad situation, your co-signing obligation ends with the loan. Private student loans don't typically offer that kind of relief. If you co-sign for a bank-backed student loan, the obligation becomes yours alone in the event of the principal borrower's death. If you do decide to co-sign, read every scrap of paperwork associated with the debt and assure that you understand all of its terms, requirements and limitations, including the potential right to receive notification from the issuer of any late or missed payments once the borrower graduates and begins his repayment schedule.
- Diverse: Private Student Loans a Nightmare for Some Co-Signing Parents
- ProPublica: Grieving Father Struggles to Pay Dead Son's Student Loans
- MSN Money: How to Deal With Student Loans After Death
- Accenture: Accenture 2013 College Graduate Employment Survey -- Key Findings
- Bills.com: When You Should Cosign a Private Student Loan
- Bankrate: Be a Loan Co-Signer and It's Your Debt, Too
- Bankrate: Escape Route for Student Loan Co-Signer?
- Experian: Cosigning for a Student Loan Can Affect Your Credit Report as Well as the Student's
- Experian: Being Removed as a Cosigner From Children's Student Loans
Elizabeth Mott has been a writer since 1983. Mott has extensive experience writing advertising copy for everything from kitchen appliances and financial services to education and tourism. She holds a Bachelor of Arts and Master of Arts in English from Indiana State University.