What to Know Before Co-Signing a Student Loan

courtesy of MoneyTips.com

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We all want to help our children get the best start in life, and for many, that includes helping them avoid excessive debt. That can lead you to co-signing student loans (or other credit sources) to help your children qualify for credit. You can then teach them how to manage debt responsibly. Isn't that desirable?

It certainly can be, but even the best son or daughter has occasional bouts of immaturity or mental lapses, and when you co-sign for a loan, you can be the one that pays for those mistakes. A new survey by LendEdu digs into the experiences of parents who co-signed private student loans for their children, and the results suggest a surprising level of concern and/or regret.

Approximately one-third of parents reported not fully understanding the risks of co-signing, and those risks are significant. "Co-signing for a loan is one of the most dangerous things you can do for your credit," says Gerri Detweiler, Head of Market Education for Nav. "You are agreeing to be 100% responsible for that loan if the other person doesn't pay, and the lender is under no obligation to tell you that the person you co-signed for isn't making the payments." Essentially, if you do not check-up and verify that payments are being made, you can be faced with unpaid bills, financial penalties, and seriously compromised credit.

When you co-sign for a loan, the loan also affects your credit report and your overall debt-to-income ratio. Should your child make overdue payments or fail to make payments at all, your credit score is adversely affected. You can check your credit score and read your credit report for free within minutes using Credit Manager by MoneyTips. The amount of co-signed debt affects your ability to qualify for the best interest rates or even qualify for credit at all, because of the higher risk that you present to lenders.

What to Know Before Co-Signing a Student Loan

The LendEdu survey found that higher risk assessment to be justified. Over 34% of co-signers' children have failed to make a payment on time and a similar amount reported that co-signing a student loan hurt their ability to qualify for financing (mortgages, auto loans, etc.). Almost 36% of co-signers report negative impacts from payment patterns. Nearly 57% of co-signers believe that their credit score has been adversely affected by the loan, and over half (51.2%) believe that co-signing for student debt has put their own retirement in jeopardy.

Regarding second thoughts, 35% of respondents expressed regret at co-signing their child's student loan and 34% would not co-sign a student loan if they had the opportunity to do it again (although one wonders why some respondents apparently regret the experience but would still do it again).

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One step you can take to protect yourself is to ask for a co-signer release clause that allows you to remove yourself as a co-signer after your child has demonstrated a history of on-time payments, but these clauses are not always available. It also requires regular on-time payments, which is certainly not a given according to the survey results.

You may have to resort to frequent checks with the lender to verify that payments are being made on time. In that case, see if the lender will send you a copy of the bill or otherwise notify you of the payment status. Remember that it is also in their best interests that payments are made on time and in full.

We won't say that you should never co-sign a student loan or any other type of loan, but we do strongly advise that you make sure that you understand the risks before you do so. Keep in mind that your son or daughter has far more years to dig out of student loan debt than you do to generate fresh retirement funds to make up for any losses.

Let the free MoneyTips Retirement Planner help you calculate when you can retire without jeopardizing your lifestyle.

This article by MoneyTips first appeared on Moneytips.com and was distributed by the Personal Finance Syndication Network.

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