Cosigning a loan may, at first glance, seem like a fairly straightforward, no-risk way of helping a loved one secure a student loan or a refinancing. Having a solid cosigner may result in better loan terms or a lower interest rate. But everyone should be fully aware of what it actually means to cosign, and what the possible risks might be before they sign on the dotted line.
The following is a post by attorney Adam S. Minsky, who focuses his practice in student loan law. Please be advised that this post is not legal advice and does not constitute the creation of an attorney-client relationship. Attorney Minsky is licensed to practice law in Massachusetts and New York.
What is a cosigner?
A cosigner is someone who signs a private student loan contract along with the borrower. Cosigners are often required when the borrower does not have sufficiently good credit or income for the student loan lender or refinancing company to issue the loan. Or the loan may be issued at a high interest rate, which can be reduced with a cosigner who has a solid credit and income history.
What does it mean to Cosign a Loan?
A cosigner is fully legally responsible for the entire student loan, just as much as the borrower is. That means that if the borrower can no longer make the payments, the cosigner is fully responsible. That also means that if the loan goes into default, the lender can pursue the cosigner just as much as it can pursue the borrower, including through the legal system. And negative information about the loan – such as a late payment or a default – gets reported to the credit bureaus for both the borrower and the cosigner. Many cosigners don’t fully understand this when they sign.
Can a cosigner later be removed from the loan?
Sometimes. Some (but not all) private student loan contracts have a provision that allows for the cosigner to be released under certain circumstances. Sometimes, the borrower must make a series of on-time payments. Other times, either the borrower or cosigner are required to make a lump-sum payment. Both parties may be required to supply financial information so that the lender can evaluate the risk of a cosigner release. And in almost all cases, the lender retains sole discretion as to whether to allow a cosigner release or not – meaning the lender can just say “no” (and they often do). So check out the loan contract to see if it has a cosigner release provision, but don’t bet on it being a guarantee.
Implications for Married Couples
When someone cosigns a student loan for their spouse, it may seem like no big deal, especially if the couple has joint finances. But it can be risky for a few reasons. For example, if both couples are signers on the loan, a household financial hardship could harm the credit of both people if there’s a late payment or a default. As another example, if there’s a divorce, that divorce will not be sufficient to eliminate the dual responsibility of both the borrower and the cosigner to repay the loan, which can lead to obvious complications.
The question of whether or not a party should cosign a loan is a tough one. It can have clear benefits, including a lower interest rate and better loan terms. But there are some significant risks and responsibilities that both parties should take seriously before proceeding.