Risks of Co-Signing a Student Loan

Any parent with a soon to be adult child going off to college is keenly aware of rising tuition rates. The cost of higher education doesn't stop there. In addition, there are textbooks to buy, a laptop computer, a printer, ink cartridges and paper for the printer, insurance for the laptop, dorm fees or the cost of an apartment, and if the young adult is caffeine dependent, an endless stream of lattes to underwrite. Students demonstrating great financial need may qualify for grants, scholarships, or loans designed to help the underprivileged. Middle class family incomes may not fall within federal or state guidelines for assistance. In this case, parents or other family members may opt to co-sign a loan. This generous act should not be undertaken lightly. Before signing on the dotted line, parents should consider the risks of co-signing a student loan.

Young adults entering college often have no credit history or somewhat tarnished credit histories. The co-signer must have an excellent credit score and the means to pay off the debt if the student defaults. This means the co-signer must have either a significant, steady income or a substantial amount of savings. Failure to pay back the loan if the student defaults can ruin the co-signer’s credit or empty the nest egg the co-signer has worked for years to create. Even if the student is a reliable, financially responsible individual, periods of illness or unemployment can make it impossible to repay the loan in a timely manner. Both student and co-signer need to be aware of these risks.

There are ways of reducing the risks of co-signing a student loan. After graduation, the borrower must provide quarterly statements demonstrating to the co-signer that the payments are up to date. The co-signer can open a special bank account and require the student to make small amounts while in school, matching or exceeding those deposits. This creates a good savings habit, and reminds the student of the responsibilities ahead. Lastly, insist the student earn the money to pay for his or her own coffee or go without.