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What should I know before cosigning a student loan?

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If your child or loved one is about to enter college and needs helps paying for school, you might be considering cosigning a student loan for them.

For students who have little or bad credit, paired with their low income, getting a cosigner is often the only way to secure a loan. Having a cosigner to a private loan greatly improves the student’s chance of being improved for a loan.

What is a cosigner?

A cosigner is a person who agrees to backup another person’s loan. If the borrower defaults on any debt payments, the cosigner is legally responsible to repay the loan.

Cosigners typically have a higher income and better credit, which enables them to secure a better rate of the loan for the borrower.

Often, you’ll cosign a loan for a child or spouse, but grandparents and other close family members may also consider cosigning a loan for a student.

Federal vs Private loans

When applying for federal student loans, often you won’t need a cosigner. There are a few exceptions, such as Direct Parent Plus loans. If a parent applies for that and the parent has bad credit, you may want to seek a cosigner.

To apply for a federal student loan, you’ll need to fill out the FAFSA. Then, based on your family’s expected contribution and the cost of tuition for your school, you’ll be allotted an amount you can borrow. But often the federal loans won’t usually cover the full cost of attending college. That’s where private loans come in.

When applying for private loans, 90 percent of these loans will need a cosigner. The benefit for the main borrower is that having a cosigner often helps improve your interest rate.

The pros and cons of being a cosigner

For the main borrower (here, the student), having a cosigner is mostly pros. By cosigning a loan for the student in your life, you’re increasing their chances of getting approved for a loan and securing a better interest rate.

While you may be willing to do anything to help your student pay for college, it’s important to realize some of the downsides of being a cosigner.

By cosigning, you’re legally responsible for the loan payments if your child stops making them.

The loan will also appear on your credit report. If there are any late payments it will hurt your credit score.

Taking steps to protect yourself

While you do your research and prepare to co-sign, take some steps to protect yourself.

Read the entire promissory note of the loan. You’ll want to fully understand what circumstances trigger a default of the loan and if there are any flexibility in the payments.

Next, ask if the loan comes with a death or disability discharge. Without this clause, if the main borrower becomes disabled and can’t pay, or the borrower dies, the cosigner may still be responsible for paying the loan.

You’ll also want to be sure you have financial savings or a life insurance policy on the borrower to help protect yourself in case you do end up having to pay off the loan in full.

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