In August and September, many college students go back to campus to find out that their financial aid package or scholarship no longer covers the rising cost of tuition. Other students have depleted their personal savings or the savings of their parents. This leaves a deficit for the student and today most students try to fill this gap by taking out student loans. Many private loans, that is non-government subsidized loans, require a cosigner in order for a student to borrow funds to continue his or her education. If you are considering co-signing for a friend or relative, consider these facts first.
1. A cosigner is responsible for the debt if the borrower cannot pay. This is the main reason so many financial advisers and counselors tell their clients to never co-sign on a loan. Even if the borrower has a good history of repaying loans, there is always a possibility of an event in the borrower’s life making it impossible for he or she to repay the loan. One client of mine was stuck with a $15,000 note that she cosigned for her daughter so that she could finish her B.S. in Aerospace Engineering. Her daughter found a job immediately after college, but several months later was involved in an auto accident that left her unable to work for several months. Although a government loan would have allowed her daughter to apply for a deferment due to the temporary disability, the private loan company simply demanded payments be made by the cosigner. Fortunately, her daughter recovered, returned to work, and was able to re-pay her mother, but the situation could have been a financial disaster for my client if her daughter had a permanent injury and was unable to return to work.
2. A cosigner’s credit can be affected if the borrower is late or if he or she misses payments. Even if the borrower does not default on the loan, any late or missing payments can be reported on both the credit history or the borrower and the cosigner. In the case of a missed payment, a cosigner is usually threatened with this step in order for the lender to collect a payment form someone.
3. A cosigner is not required to receive a report on the behavior of the borrower. Often, a cosigner receives a call from the lender after a payment is missed by the borrower with no prior notice that the borrower was having financial problems. While a lender can monitor a credit report to look for signs of financial trouble (carrying higher balances on credit cards, applying for a personal loan, etc.), the lender is under no obligation to report these findings to a cosigner. Thus, many cosigners are taken by surprise when they find out they owe a lender money for their friend or relative’s missing payments.
If co-signing is the only option for a friend or relative of yours to get the financing he or she needs to complete their education, make sure you understand everything you are signing. I often advise clients who feel they have no other choice but to co-sign to make sure they could assume the monthly payments if they had to, and to have a written agreement between themselves and the borrower that they will be given at least two weeks notice of any impending financial problems.