When you co-sign a student loan, your credit score could be adversely affected. The three companies that keep track of your credit are, TransUnion, Experian and Equifax and they all use a program from Fair Isaacs Corporation, called FICO, to determine your credit worthiness. By co-signing for a student, you are saying that, if the student for whom you cosigned does not perform on the loan as agreed, you will assume the obligation. You may have good reason to do this, but you should consider the consequences before doing so.
Significance
When you cosign for a student, your own borrowing power will be affected because lenders will treat it as if you borrowed the money yourself. In fact, according to the FTC, for certain lenders, about four out of five loans for which a cosigner was required had to be repaid by the cosigner. For that reason, lenders will consider it when they lend you money in the future.
Time Frame
The cosigner will remain liable for the full term of the loan. If, for example, the student gets into financial difficulty three or four years after you cosigned a note for his education, the lender can pursue you for payment. In extreme cases, the lender will force you to sell assets to pay the debt.
Function
In many cases, a parent will be asked to cosign a loan for tuition because the student had a poor or non-existent credit history. Also, very often when the young person applies for his first credit card or automobile loan, the lender will require that all documents be cosigned.
Geography
When a student fails to perform according to a contract that you have cosigned, in most cases the lender must first make an effort to have him pay what is owned before approaching you, the cosigner. That is governed by the laws of the state in which the contract was signed.
Prevention/Solution
Before you cosign a loan for a student, consider having a lawyer draft a contract that sets out the student's and your obligation to the debt, and ask him to enumerate the steps each person should take to repay the debt. It is important that it include steps the student should take to pay off the loan. This document will not prevent the creditor from pursuing you for payment, but it will formalize your duties as cosigner of the note.
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