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The Pros and Cons of Cosigning Student Loans
Just about every kind of loan available can have a cosigner, and student loans are no exception. In terms of financial aid, loan cosigners generally apply solely to private student loans, which are based on the credit score of the borrower(s).
In most cases, the credit score and the interest rate are directly proportional, so if a borrower has an excellent credit score, his or her interest rate will be significantly lower.
Low interest can either mean that there will be a lower monthly payment or that there is an opportunity to pay off the loan much more quickly. Loan cosigners come in handy when the borrower may not have the best credit rating but needs the money very much.
However, before considering becoming a loan cosigner - or asking for one - it is vital to understand exactly what it means to have or be a cosigner.
Instead of focusing on how a cosigner benefits the borrower, first we are going to consider how it benefits the cosigner. Naturally, the cosigner does not reap as many benefits as the borrower, simply because it is generally not the loan cosigner who needs the money as much.
However, a parent cosigning for his or her child does have the added gain of knowing that, if he or she has a good credit rating, it can add up to far less money at the end of the child's college career, meaning that the parent takes a potential burden off the child.
From the loan cosigner's perspective, there are far more cons to cosigning - potentially.
That is why it is so important to think very long and very hard before cosigning a loan for anyone. The loan cosigner has far more at stake than the borrower, so it is vital to be aware of all the risks. All one need to is consider the following tips and warnings.
First and foremost, a loan cosigner must be very, very certain that they can trust the person for whom they are cosigning. Anyone familiar with cosigning will advise that it is not at all prudent for people who are in a relationship to cosign for each other.
This includes couples who are dating as well as married couples. Nothing is certain in this world and if at any time the relationship ends, the cosigner could be left with an enormous student loan for which he or she is solely responsible.
In that respect, it is also important for a potential cosigner to be sure that should the borrower not pay for whatever reason the cosigner has the means to make payments on the loan.
Paper trails are crucial when it comes to being a loan cosigner. Everything needs to be documented in writing. Not only that, but it is best to draft an agreement between borrower and cosigner, and to then make sure that it is notarized.
This might be difficult to consider if a parent is cosigning for a child, but the responsibility involved in cosigning is a two-way street. Anyone asking for a loan cosigner is thereby stating that he or she is responsible enough to handle the loan on his or her own, even though a cosigner is present. They should thus be willing to stand by that responsibility and agree that they should in no way be allowed to default on those responsibilities.
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