Student loans can be risky business. The lender can’t repossess and sell a degree or a student’s education like they can with a car, truck or home loan. Building credit is also not something that happens overnight. These are a couple of factors why a student loan borrower may need a cosigner. So why would someone cosign a loan and what should they know before they do?
Let’s start with the why.
If a student doesn’t have enough in federal student loans, savings, scholarships and grants to cover the cost of their education, a private student loan may be their only option and without a cosigner, it may delay or stop their educational goals. It could also help build a positive credit history for the borrower.
What should a cosigner know before they commit?
The decision to cosign a student loan is not one to take lightly. Here are a few items to consider:
It may be a long-term commitment.
By cosigning, you are promising to repay the loan if the borrower does not. Considering a loan term can be 10 to 25 years, it could be a long-term, expensive commitment if the borrower does not follow through with their obligation to repay the balance. Some lenders offer a cosigner release or replacement option if certain criteria are met. Bank of North Dakota (BND) is one of those lenders.
It affects borrower’s and cosigner’s credit history.
The loan appears as a debt owed on the credit report of both the borrower and cosigner. Depending on your individual situation, this could limit your ability to apply for other lines of credit. If the loan becomes past due at any point, it could be reported, damaging your credit, and could also lead to a collection account.
Student loans are not typically discharged through bankruptcy.
Student loans are handled differently from other types of debt when it comes to bankruptcy filings. In reference to federal student loans, a separate action must be taken. “Undue hardship” meaning significant or excessive difficulty must be proven in all cases.
Ultimately, you should carefully consider cosigning a loan if asked. Ideally, the person you cosign for is reliable, never late and never misses a payment. Your willingness to risk your credit helps the borrower get the loan and can help them build a positive credit history. You must also be prepared to pay back the loan in case they don’t.
Specific information on cosigning Bank of North Dakota student loans is available on the BND website.