Should you Cosign a Student Loan - What are the Risks?

Parents want the best for their children and the want to provide for them so offering assistance is a natural tendency. When it comes to student loans, most parents would like to help, so cosigning to allow them to get that loan they need obviously seems to be a good option.

Cosigning can, for the most part, be advantageous for both parties, but only if handled correctly. Parents do need to understand that their are risks involved. Most feel that they have no other option when the need to be their for their children in their time of financial need. Some of this arises from guilt do to inability to afford the high cost of attending college, and other times it is more purposeful to guarantee the child's own investment and to build character, responsibility and credit.

Whatever the reason, here are the most popular concerns today involving risks associated with consigning for a student loan.

Does Cosigning for a Loan affect your Credit?

The short answer is yes it can, but it is much more complicated than that and many options as well as specific circumstances affect the risk. There are a few questions that must be addressed to determine the actual risk involved with cosigning and how it affects credit. First of all both parties are considered equally responsible if the loan defaults and even a history of late or missed payment can be recorded.

The main thing to keep in mind as a parent is that cosigning is not just a way to get your child the loan and then they are responsible to pay it off. Parents must also actively participate in keeping the loan current and insure a good payment history. A number of factors go into credit history and defaulting on a student loan can adversely affect both you and your child's credit.

What are the Legal Ramifications when Cosigning a Loan?

Their are many legal ramifications associated with default of a cosigned loan. The main misnomer is that both parties are considered equally responsible. This is not always the case because when a loan is set up to allow for cosigning it is the lenders prerogative to deem which party is primary for pursuit of the loan amount and in many cases it is you.

This means that by cosigning you in essence are taking over complete responsibility for payment of the loan and in the case it defaults, it is you they pursue for collection. This has caused much misunderstanding and in many cases court costs, legal fees, and even loss of home.

How to get your name off the Loan after Cosigning?

Many people are not aware of the fact that many loans have an option or provision for removing your name from a student loan after both have initially signed as responsible parties. This provision is known as a Cosigner Release Option and some lenders have this option and others do not.

You should always check with different lenders to determine what options they provide and under what circumstances you might qualify. Lenders that do provide and option for you to get your name off the loan after cosigning usually have to determine both parties existing credit and financial status to determine if one qualifies for this option and under what restrictions.

Most cosigner release options require the loan to be payed on time for a designated amount of time before the cosigner can be removed from the loan. This time period required is usually at least 2 years of good payment history and sometimes as many as 4 to 5 years.