Potential Liabilities of Cosigning Student Loans

We all want to help our children achieve their dreams, and getting a university education is an important part of this in many cases. With tuition costs skyrocketing, it becomes difficult for many university students to finance tuition on their own. In order to make it easier, students get private loans to cover the shortfall after scholarships and federal loans. Unfortunately, according to a 2012 report on private student loans done by the Consumer Financial Protection Bureau and the Department of Education, more than 90 percent of new private student loans now need to be cosigned, which means that parents, grandparents or other relatives are increasingly becoming responsible for these debts as well.

Although we may feel like it is no big deal to cosign or that we have a responsibility to do this for our children, it is important to consider the financial implications of cosigning, as well as potential liabilities immediately and later on down the road. The following are five major risks that you will face as a cosigner on a student loan.

• Cosigned loans can affect your credit. While you may have great credit now, a large student loan could make it more difficult for you to take out other loans or credit cards in the future. If you think you may want to make a major purchase, such as a new car or home, cosigning a loan may prevent you from getting a loan or change the rate you could otherwise get. Additionally, if the student cannot pay the loan after graduation or misses payments, your own credit will be damaged. Even a few missed payments can affect your overall creditworthiness.
• You are betting against the financial advice of the bank. The reason that the bank is not giving the student a loan is that the financial calculations it has made determine that your student will not be able to handle the debt. While you hope that after graduation, his or her prospects will change drastically, it is not always the case. Be sure that your child is responsible with money, or it could hurt you later.
• You may end up responsible for paying off the debt yourself. While as a cosigner you generally shouldn’t have to pay, in reality, there are many cases where you may find yourself on the hook for the money. If your child can’t find a job or becomes unemployed, payments may fall to you. Furthermore, in the event of a tragedy that means that your child cannot work or even dies, the full loan will fall on you.
• The balance of debt can hurt your relationship. Although the money won’t be a matter of stress if the student pays it off in a timely manner, a default can put a strain on you both as individuals and even permanently damage your relationship. Money issues can pull families apart, especially if you are unable to handle the added payments.
• The commitment is generally for the entire (often long) duration of the loan, as it is very difficult to get your name off the loan. While most lenders offer a cosigner release after a number of consecutive on-time payments, it can sometimes be difficult to make this go through. Usually the primary borrower must meet certain income requirements and have a satisfactory credit score, which can take years to accomplish. If your name is still on the loan, even years later, it can continue to hold a majority of your credit. Don’t assume that when your child graduates you can get out of your loan responsibilities, because this is often not the case.

These are serious financial issues to consider, so while you may decide it is worth the risks to help a young student get a good education, it is important to make this serious decision only after looking at all the facts.

If you are struggling with debt or you are being harassed by creditors, contact Ohio consumer law attorney Jeremy Heck for a free consult. Call (888) 726-3181 today.