If your college-bound son, daughter, relative or friend needs help to qualify for a student loan, you may be able to cosign. Co-signing makes you a co-borrower, with full responsibility to the lender in the case of non-payment. Although it's a worthy act, co-signing a student loan or any other loan can be fraught with financial hazards.
According to the "Wall Street Journal," more than 90 percent of private student loans in 2011 had cosigners. Private lenders are more likely to require co-signers than federal lending agencies that originate Stafford loans and other publicly financed borrowing. Student-loan lenders will carefully review co-signer applications before approving them. They may ask for financial information such as tax returns and bank account statements, and run a credit check through a credit-rating agency. Sallie Mae, which originates the majority of private student loans in the United States, also looks at a co-signer's debt-to-asset ratios, employment history, and length of time at current address.
Credit Rating Riskiness
A co-signer takes on full responsibility if the student borrower is unable to make on-time payments, or if the loan goes into default. Missing a single payment equals delinquency, while nine months of missed payments signifies a default. Either one on a credit report will damage the co-signer's credit rating. If the primary borrower misses payments, or starts running 60 or 90 days late, that will also be reported to the credit bureaus.
Lending Regulations, and the Lack Thereof
Federal loans are subject to the Higher Education Act, which regulates federal student aid and lending. Although the HEA sets limits on loan interest, fees, penalties and terms, its rules do not apply to private lenders. A bank or other private lender, for example, isn't required to offer special programs to assist borrowers in case the loan defaults. Although some private lenders may allow a co-signer release if the principle borrower manages on-time payments after graduation, they can still turn down a release application on their own guidelines.
Bankruptcy and Other Unpleasantries
Unfortunately, private and public student loans are forever -- by federal law, borrowers can't discharge them in bankruptcy. This would apply to a co-signer as well as the primary borrower. The law does allow a hardship exception, but this is a high hurdle to jump. Even in bankruptcy, it would require a special, and expensive, court hearing. In addition, a lender can bring a co-signer to court, and with a favorable verdict pursue collection through wage garnishment, bank levies and property liens. If the co-signer dies with a past-due balance, lenders also have a claim against the estate.
Founder/president of the innovative reference publisher The Archive LLC, Tom Streissguth has been a self-employed business owner, independent bookseller and freelance author in the school/library market. Holding a bachelor's degree from Yale, Streissguth has published more than 100 works of history, biography, current affairs and geography for young readers.