Committing to take on a student loan is a serious decision. With federal student loans, the student can borrow funds on their own. Federal undergraduates are evaluated by the information they submit on their Free Application for Federal Student Aid (FAFSA). With private student loans, they may need a co-signer.
There are a few things you need to know before agreeing to co-sign a student loan. First off, understand that when you create a plan to pay off debt, the student loan will be part of your debt if the student is unable to fulfill their obligation. Legally and financially, you’ll be on the hook for that unpaid balance.
Requirements to be a co-signer
According to the federal Consumer Financial Protection Bureau (CFPB), a co-signer for a student loan does not have to be a parent. The exact language defines a co-signer as “a person, such as a parent, close family member, or friend who pledges to pay back the loan if you do not.” Agreeing to this makes the co-signer a voluntary participant in a legally binding contract.
Because you’ll be co-signing a private student loan, the lender will be reviewing your credit history and credit score, resulting in a hard inquiry on your report, which could lower your score temporarily. Be prepared for this. The lender also will check the student’s score and history, but that carries less weight when a co-signer is involved.
Though you’re entering into a binding contract, it does not have to be a lifelong obligation. Certain lenders offer student-authorized releases of the co-signer after some time has passed. Sallie Mae, for instance, will allow a release after 12 on-time payments, provided the student agrees to a credit review and meets certain credit requirements.
Student obligations and responsibilities
There are three parties to a co-signed student loan contract. The lender is the source of the funds, the student is the primary borrower, and the co-signer is the secondary borrower. Each borrower shares equal responsibility for repayment of the loan, but it’s expected that the student will fulfill the obligation. The co-signer essentially acts as insurance for the lender.
It’s in the best interest of the student to make payments on time because that will help them build their own credit history and increase their credit score. This will be beneficial to them later in life when it comes time to apply for a credit card, buy a new car, or take out a mortgage. It’s also a good opportunity for them to build good financial habits.
Federal Direct PLUS Loans for parents and graduate students
The cost for higher education continues to rise each year. Student loans don’t always cover all the expenses involved, so the federal student loan program also offers Direct PLUS Loans for eligible parents and graduate students. Unlike standard student loans, Direct PLUS Loans can be co-signed.
Kevin is a former fintech coach and financial services professional. When not on the golf course, he can be found traveling with his wife or spending time with their eight wonderful grandchildren and two cats.