Weigh the options before co-signing a student loan

iStock-student loan application.jpgGetting a private loan will likely require a co-signer for students with little credit history. Anyone can co-sign if they meet the credit requirements, but guaranteeing someone else’s loan comes with risks. Co-signing your name to a loan is nearly the same as taking the loan out yourself. It will show up on your credit report and if the borrower doesn’t make payments, you’ll be held equally responsible.

Before you co-sign a student loan, Consumer Reports offers the following advice:

  1. Exhaust federal options. Ensure the student has applied for all federal aid they’re eligible for: scholarships, grants, work-study, and federally backed loans. Federal loans don’t require a co-signer and come with protections like deferment and payment flexibility if you’re having trouble paying.
  2. Don’t let low rates fool you. Private student loans typically have variable interest rates that may be below the rate government loans charge. But variable rates can rise, which can make the total amount you owe significantly greater. Many private loans also require payment while the student is still in school.
  3. Understand the terms. Read the entire promissory note required to get the loan. Understand what circumstances prompt a default and whether there is any flexibility in payments. Check if the loan comes with a death or disability discharge, or you could be responsible for payment if the borrower is unable to pay.
  4. Get a co-signer release. Some loans come with a co-signer release provision. After several on-time payments or when the primary borrower achieves a specific credit score, you might be able to remove your name from the loan.
  5. Check out the student’s finances. Protect yourself by understanding the borrower’s financial situation. Calculate the monthly payment and how much the total cost of the loan will be with interest. Can the student handle the monthly payments?

If you’re uncomfortable co-signing, don’t do it. If you do co-sign, keep track of the loan and confirm that payment obligations are being met.

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