If you're thinking about cosigning a student loan, you've probably already read about what it entails. That said, there's a lot of misinformation on the Internet, and it's worth separating fact from fiction in order to understand exactly what cosigning is.
When you cosign a loan for somebody, you're essentially serving as a guarantor—one who's assuring a lender that the monthly payment owed on the loan will get paid in full. That means that if the main borrower can't pay in a particular month, it will fall to you to cover the agreed-upon amount.
Beyond that, there are a lot of contradictions out there.
Don't worry, though—CommonBond has combed through Internet articles and op-eds and
compiled a list of four of the most-cited misconceptions regarding
student loan cosigning, and why they're inaccurate.
Misconception #1: Cosigning a Loan Hurts Your Credit
Many people are afraid that cosigning a loan will lower their credit score. If the borrower on the loan doesn't make timely payments, it will have a negative impact on a cosigner's credit score, but the opposite is also true—if the borrower makes every payment in full and on time, both the cosigner's and borrower's credit scores will actually rise.
Another concern is that shopping around for rates will hurt your credit, as each potential lender will do a hard credit pull. That's inaccurate, as FICO allows a 30-day grace period for loan shopping that doesn't affect your credit. And, this shopping period should only lower your credit score 5-7 points.
For more information on cosigning and credit, click here.
Misconception #2: Cosigners Won't Have Access to Loan Information
Some people worry that cosigning will leave them powerless. In their view, they're liable for payment should the worst happen, but as they're not the primary contact on the loan, they won't receive information from the lender.
The truth is that, while the borrower is the first party
contacted by the lender in the case of delivering or requesting information,
the cosigner is privy to all of that same information. All it takes is a phone
call to the lender, and a cosigner can learn everything they need to about the
terms and state of the loan.
Misconception #3: Once a Cosigner, Always a Cosigner
Cosigning can seem like a big commitment if you're locked into 10 or 20 years' worth of checking on a lender's finances. Thankfully, most lenders offer cosigner release programs, where a borrower who's consistently paid on time can remove the cosigner from the equation.
At CommonBond, borrowers who have taken out CommonBond loans
to pay for school are eligible to release their cosigners after these borrowers
have graduated from college, turned 21, met credit scoring criteria, and made
24 consecutive on-time full payments.
Misconception #4: It's Easier to Just Give Someone the Money
Some sources argue that it's preferable to cut out the middleman and simply lend money directly to a would-be borrower. That way, they say, you won't have to worry about any of the risks associated with cosigning.
Even for the small fraction of parents who can afford to pay for their children's educations out-of-pocket, this can be a mistake. Allowing your children to take out their own loans will not only build their credit, but it can help them understand the responsibility of making regular payments. Cosigning for a child and encouraging them to get involved in the loan process can be a major opportunity for a lesson in adulthood.
Cosigning for a loan is a big financial decision, and like any other big financial decision, it should not be undertaken lightly. Only cosign a loan for someone you trust to make their payments, and even then, make sure that you can afford to cover them should the worst happen. That said, it's wrong to dismiss cosigning offhand when it can be so helpful in the right situations. Now that you know the truth about cosigning, you're ready to help someone you know get the money they need for college.