Co-signing on someone else’s private student loan isn’t a decision to make lightly.
While parents represent three-quarters of co-signers, it’s not unusual to see others pitching in, according to a new report from private loan marketplace Credible.com, which assessed nearly 8,000 borrowers who requested a quote through the platform. Among loans with co-signers, 3 percent used a sibling, 11 percent another relative, and 2 percent a friend.
Having someone else lend their good credit can yield more affordable loans. Only 20 percent of undergrads applying on their own qualified for a personalized rate quote, Credible found, and they got an average loan rate of 7.46 percent. (Some offers were for fixed-rate loans, others, variable rates.) When undergrads applied with a co-signer, 51 percent qualified, and the average loan rate on offer was 5.37 percent.
But co-signing is risky. It ties you to that debt, meaning you could be responsible for the entire amount outstanding if the primary borrowercan’t — or won’t — pay up. Nearly 40 percent of co-signers found themselves on the hook for at least part of the bill, according to a June survey from CreditCards.com, and 28 percent saw a drop in their credit score from the primary borrower’s bad credit habits.
“A lot of people enter into these situations wearing rose-colored glasses,” Bruce McClary, a spokesman for the National Foundation for Credit Counseling, told CNBC.com earlier this year. “They’re not seeing reality where it is and the potential for things to go wrong.”