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What to Know Before Cosigning for a Student Loan

In order for parents to protect their credit score and their children’s financial future, careful consideration must be given to any situation involving the cosigning of a student loan. Many parents wish to support their children’s education endeavors, but there are certain things which must be considered before a final decision is made to cosign a student loan. The best way to decide if this is a viable solution for you and your family is to identify and discuss the benefits versus the risks, and create a plan that will leave little or nothing to chance.

Risks Vs Benefits of Cosigning

Many students who apply for education loans will find that they need a cosigner in order to be approved for the loan. When a parent agrees to cosign a loan, they are taking full responsibility for the payment of the entire loan should the student be unable to repay the money to the lending institution. While it is true that this can be a risky venture, there are some benefits that are worth mentioning. A student loan that is cosigned by parents with a higher income and a positive credit history will result in a lower interest rate for the student, which means less total money borrowed. It also helps the student to establish his or her own credit score information, which is an important life step.

When listing the positive aspects of this arrangement, equal consideration must be given to its risks. The major risk associated with cosigning a student loan is the possibility that the student will be unable to make the loan payments. In this case, the cosigner has relatively few options as the late payments (or nonpayment) will show up as a blemish on their own credit report. The only way to save your own credit rating is to take over the repayment of the loan.

Repayment Considerations

It is important to sit down with your child before cosigning a loan and discuss a repayment plan. The student should understand that if he or she cannot make one of the loan payments, it is vital that his or her parents be made aware of this as soon as possible. It should also be understood that the parents will have access to the account so that they can check to see if the payments are being made.

The next step is to create a hardship plan, in case the student ends up in financial difficulties that would prevent him or her from making timely payments. perhaps the student can make part of the loan payment, and the parents make up the difference. After the loan has been repaid, the student can, at that point, begin making payments on the money owed to his or her parents. In addition, the parents may agree to take over the payments for six months until the student is back on his or her feet. Then when the last payment is made to the financial institution, the student must make six additional payments to his or her parents.

Naturally, each situation is unique, and one must weigh the risks and benefits based on his or her individual circumstances. However, if care is taken to discuss every detail, and ensure that nothing is left to chance, most likely terms can be reached that will benefit both parties. Advantage CCS can help your student understand debt management. They can work with you and your family before, during and after the loan process to ensure that the entire family stays on the path to good credit.

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