Around 90 percent of new private student loans are taken out with a cosigner.
College students, who are typically younger – in age and credit history – often don’t meet the eligibility requirements for private student loans alone, making a cosigner less of a choice and more of a necessity. Additionally, those who are qualified student borrowers may still find a cosigner is a better option, as they can help secure lower rates.
Though cosigners can be a huge benefit to students in need, they are also taking on a considerable amount of risk by cosigning. The cosigner will be on the hook for the loan, a responsibility that could potentially lead to a damaged credit score, difficulty accessing financial products down the road, and a strained and unhealthy relationship with the borrower.
Is Your Relative Qualified to Be a Cosigner on Private Student Loans?
Though requirements may vary from lender to lender, typically cosigners, regardless of their relationship to the borrower, will need to meet the following requirements:
- Be either citizens or permanent residents of the United States
- Have a valid Social Security Number (SSN)
- Pass a credit check. Generally speaking, most private student loan lenders require cosigners to have a credit score of at least 650, but many lenders are hesitant to extend cosigning responsibility to applicants that have less than a score of 700.
- Have a low debt-to-income ratio and a history of proven financial responsibility
Risks for the Cosigner to Be Aware Of
Student loans come with their fair share of risks for the borrower, but cosigners also put themselves at risk. If you’re thinking of becoming a cosigner, here are a few things you need to be aware of:
- If the borrower can’t make payments on the loan, you will be responsible. And, if that inability to make payments sends the loan into default, the cosigner’s credit and potentially finances can suffer.
- By definition, cosigners share ownership of the debt. As such, their debt-to-income ratios will increase as long as their names are on the loans.
- In the unfortunate case of a borrower’s death, the cosigner may now be fully responsible for repayment. Before signing a loan agreement, the cosigner should inquire with the lender and check the fine print to see what happens should the borrower pass away or become permanently disabled.
Asking a Relative to Cosign a Student Loan
Asking a relative to cosign is a big commitment, and therefore, you should approach this request with care. Be organized, come equipped with a plan, be upfront about the total loan amount and expected repayment period, and provide them with all the information required to make an informed decision.
Since you’re asking for a significant favor, it should be up to you to help the cosigner navigate the application process and fully understand the responsibilities involved. This includes informing them of application requirements like deadlines, paper work, etc.
Finally, and perhaps most importantly for you and your potential cosigner, you should have a well-designed plan to show that you can and intend to make payments in a timely matter. It’s also beneficial to include how you plan to pay for the loans should you lose your job or have a significant shift in income.
How to Reduce the Risk to You and Your Cosigner
As the borrower, you should make every attempt to reduce the risk to you and your cosigner. To do that, consider the following:
- Only borrow what you can reasonably repay and what you actually need. Make a conservative estimate about your projected earning in your field and set a limit that does not exceed those earnings.
- As mentioned above, you should have a plan in place to cover your loan payments should your primary source of payment be compromised (i.e., loss of a job). Emergency savings, property you can sell, or side work that you can take on all represent feasible options.
- Choose a lender that offers hardship relief. Not all lenders extend this benefit, and though you may never need it, it’s invaluable should you find yourself in a bad situation.
- Review cosigner discharge policies and choose a lender that will discharge your cosigner after a certain amount of payments are made on time.
In many cases, adding a cosigner can help you secure student loans and often at lower rates. However, the role of cosigner comes with a fair amount of risks and responsibility. If you’re asking a relative to cosign for you, be sure to review the pros and cons together and determine if cosigning represents reasonable and manageable commitment.
If you cannot find a cosigner or decide that you would rather not have one, there are certain lenders who offer loans to students without a cosigner. Though the interest rates are typically higher, sometimes these loans are necessary to cover the costs of college.
Author: Jeff Gitlen
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