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4 Risks Cosigning Loans for Students

by Sneha

After getting admission to a college or university, the next step is to pay school fees and start learning. But since most students don’t have the capacity to pay the required amount from their pockets, they are forced to seek loans from private lenders.

Most financial institutions are always reluctant to lend money to entities or people they don’t know. This is because they are unable to gauge the financial habits of an applicant without their credit information. What if the student turns out to be someone who doesn’t pay his or her debts?

Dealing with uncertain borrowers can be highly risky to private lenders. They can end up spending a lot of time and money following up for repayments. What is the solution to this problem? This is where student loans with cosigner come in. 

According to Ascent Funding, “if you don’t qualify for a loan in your own name or for the full amount needed to cover your expenses,” you should consider applying with a creditworthy cosigner.

What Exactly is a Cosigner?

A co-signer is the equivalent of a loan guarantor. Since a student may not have a credit history, a private lender will require a co-signer before issuing a loan. The first person in line is always the parent of the student.

But it is always important to understand the risks that come with co-signing student loans. While it might be a good idea to help your child or relative pursue his or her career, agreeing to co-sign without a proper understanding of the terms and conditions can cause major problems down the road.

4 risks cosigning loans for students:

  1. A co-signer is treated like a co-borrower

 

A lot of people don’t fully understand what it means to cosign a student loan. You may not realize but the lender treats you just like a co-borrower. Although you are not the one borrowing the money, the loan will reflect in your credit reports – showing you borrowed it. This means you have equal responsibility in repaying that loan.

  1. You may not be able to remove yourself from the loam

 

Some people agree to cosign, knowing that they can detach themselves from the loan sometimes later. This is a big mistake. Although it could be true in theory, the reality on the ground is different. The whole process of getting your name removed as a cosigner is cumbersome and sometimes impossible.

 

As such, it would be important to carefully go through the terms and conditions of the lender before you agree to cosign a student loan.

  1. The loan obligation goes beyond the amount of money borrowed by the student

 

It is important to note that the student will not pay the exact amount of money borrowed. The total amount to be repaid may significantly increase due to interest and late payment penalties. This means your overall debt is also going to increase.

  1. If the borrower fails to repay the loan, the lender will come knocking at your door

 

In the event that the person borrowing the loan, for any reason fails to pay back the loan, it will be your responsibility to ensure the loan is repaid.

 

Bottom line

Cosigning student loans comes with many risks. Even if it is your child, you need to carefully evaluate the lender’s terms and conditions before agreeing to cosign.

 

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