College is an exciting time in a teenager’s life, but it often comes with it the responsibility of student loans. If your child or close family member is planning to pay for college using student loans, they may have asked you to be the co-signer their loan. An absent credit history or low income may make many teenagers ineligible for a loan without a co-signer. Before you sign on the dotted line, here are a few things you should be aware of:
1. Co-signing a loan is a legal responsibility
When you co-sign a loan, you are taking on joint responsibility. This means that if the student is unable or unwilling to repay the loan, the onus falls on you to pay back the loan in full. This is a huge responsibility and not one that everyone may necessarily be ready for. Some parents consider alternatives to co-signing, such as coming up with additional financing. For example, if you have a permanent life insurance policy, such as whole life insurance, you may choose to borrow against or withdraw from the cash value to pay for tuition instead of taking out or co-signing for loans.
2. You’ll need to have good credit
As a co-signer, your signature gives the loan application the benefit of your income and credit history. In essence, the student is relying on your reputation as a responsible borrower to lend credibility to their loan application. Knowing that the loan is co-signed by someone with good credit helps reduce the risk for the lender. This means you need to have strong credit to be able to lend credibility to the application. If you are considerably in debt, or if your credit score has been damaged by late payments, you may not make a good co-signer. If this is the case, it’s best to be honest about your situation with the borrower when they ask for your help so they can seek out another co-signer.
3. Your ability to borrow may be affected
When you co-sign a loan, it appears on your credit report and affects your debt-to-income ratio. This means that your ability to get a loan may be negatively impacted. If you’re seeking a personal loan, car loan, or a mortgage, you may have trouble securing one or the loan terms may be less favorable. This is a serious consideration for anyone, but especially someone planning on making big purchases in the near future.
4. Your relationship with the borrower may become strained
Remember that when you co-sign for a loan you are essentially taking on responsibility for someone else’s debt. If the student misses payments – even unintentionally – it may hurt your credit score. If they are unable to repay the loan for any reason, you will have to repay it. These types of situations can create immense strain between even close family members. Before co-signing the loan, the co-signer and borrower may want to have a frank discussion about a repayment plan.
The primary purpose of permanent life insurance is to provide a death benefit. Using permanent life insurance accumulated value to supplement retirement income will reduce the death benefit and may affect other aspects of the policy.