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Cosigning a Student Loan: Pros and Cons
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If your child or loved one is exploring private student loans to pay for college, you may have already discovered how hard it is for them to qualify on their own. They may need a student loan cosigner — requirements for credit and income can be very strict, especially if you want a loan with competitive rates.
However, becoming a student loan cosigner is a big decision, and there are a lot of factors you’ll need to weigh. Here’s what you need to know about the pros and cons of cosigning a student loan.
As a parent, grandparent or another adult in the student’s life, you might find yourself having to choose whether to fulfill the student loan cosigner requirement. By becoming a cosigner, you can use your income status and credit score to help your loved one obtain the funds they need for college.
Cosigning a student loan means you are acting as a co-borrower and taking legal responsibility for paying off that loan. As a result, if, down the road, the student is unable to make payments, you’ll have to.
This can put the student in a good position to not only afford college, but also to build their credit score and get lower interest rates (which can make their student loans more affordable).
Who can cosign a loan?
● Student loan cosigners are typically the parent, guardian or loved one of the student (such as a significant other, friend or relative).
● While criteria for becoming a cosigner varies from lender to lender, typically, a lender will require that you’re the age of majority (typically 18 years old), have U.S. citizenship and meet a minimum income requirement. Lenders also usually require that cosigners have a certain credit score, a good credit history and are in good standing with other creditors
Private lenders typically have minimum credit and income requirements borrowers will need to meet. Students — especially if they’re younger — may not have the credit history or score to obtain student loans to cover the cost of school.
That’s where you can come in, since cosigning a loan is the same as if you are borrowing the loan, said Mark Kantrowitz, the publisher of Saving For College.
“You are not just enabling them to get a loan or to get a lower interest rate,” said Kantrowitz. “For all intents and purposes, you are borrowing the loan.”
By cosigning a student loan, you can use your established credit history and income to help your loved one get approved for student loans. This is why it’s important that you have a consistent income and check your credit score before volunteering to be your loved one’s cosigner.
By getting access to a student loan, your loved one will have the opportunity to repay it, which can eventually build up their credit score and history. To do this, they’ll need to make minimum payments on time until the loan is paid off.
Having a student loan to pay off can help your loved one learn to responsibly manage debt and put together a budget so they’ll have enough money to make repayments.
This can eventually lead to the student building up a good credit rapport, which can help them to acquire other types of credit like personal loans, credit cards, car loans, mortgages and personal lines of credit.
While a student might have a difficult time obtaining a loan — let alone low interest rates — by cosigning a loan, you lower the level of risk in the eyes of the lender. As a result, your creditworthiness may convince lenders to offer lower rates, better terms and larger borrowing amounts. However, be sure to review with the student beforehand how much they want to take out in loans, as too much debt can become a problem.
Obtaining low interest rates for your student can make repaying the loan much more affordable for them, and may allow them to more easily keep up with loan payments.
When you cosign a student loan, you’re not merely adding your name in support of the primary borrower. Really, you’re pledging to be equally responsible for paying the loan back in full and on time — especially if there isn’t an option for cosigner release.
Before cosigning, speak with your student about expectations around repayment. Make sure to consider any risks associated with taking out this money.
“When deciding to cosign a loan, you should evaluate the risk that you will have to repay the debt,” Kantrowitz said. “How much is being borrowed? How likely is the student to graduate? How likely are they to get a good job after graduation?”
Along with discussing these questions with the student, use a student loan calculator so you both have a clear sense of what repayment will look like. Make sure you’re both on the same page about repayment before borrowing any money together.
Even though you’re an equal co-borrower of the loan, notification about the loan’s status isn’t necessarily one of your student loan cosigner rights. If the student misses payments, you might not find out until it’s too late.
“The lender is under no obligation to alert the cosigner if the primary borrower falls behind,” said Michael Minter, managing partner of financial advisory firm Mintco Financial. “The first indication will probably be a drop in their credit score.”
Even if the student is responsible about paying back their loan, they could accidentally fall behind due to missing communication from their lender or not realizing their loan was sold to a new servicer.
Since cosigning a loan is essentially the same as borrowing a loan, your credit will be on the line in the event of missed payments, delinquency or default. Late payments drag down a credit score, and a defaulted loan could significantly damage your credit.
“The cosigned loan will show up on your credit report as though it were your loan, because it is your loan,” said Kantrowitz. “If the student is late with a payment or defaults on the loan, it will ruin your credit, not just the student’s.”
Make sure the student provides their servicer with updated contact information so they don’t miss any important news. You should also encourage them to sign up for autopay and to check on their online accounts from time to time so they know they’re current on their payments.
Since your cosigned loan will show up on your credit report, it will impact your debt-to-income ratio. As a result, it could hurt your chances of qualifying for other types of loans, like personal loans or mortgages. At the very least, it could mean you end up with a less competitive interest rate.
“Your borrowing ability could be affected,” said Logan Allec, a certified public accountant and founder of personal finance site Money Done Right. “Since any student loans you cosign on appear on your credit report, the loan will be factored into your personal debt-to-income ratio if you apply for a loan yourself.”
So before cosigning, think about your financial goals in the years to come.
“Consider whether you anticipate needing to borrow money over the life of the loan,” advised Allec. “Determine whether or not the student loan amount would be enough to skew your debt-to-income ratio drastically, and factor that into your decision.”
If cosigning the loan will have a significant negative impact on your own ability to borrow, it might not be the right move.
Sharing debt is an undertaking that shouldn’t be taken lightly. Even if the student has every intention of repaying the loan, they might run into financial hardship or struggle to find a job after graduation. For some people, this can lead to challenges in the relationship they have with that student.
“Student loans are usually for large amounts of money, and a cosigner will be required to repay it if the borrower does not — this can put a serious strain on your relationship,” said Allec. “Have an honest conversation with your child before agreeing to cosign about your expectations and concerns, and work up an agreement on paper together that you can point to if needed.”
By having these important conversations before you borrow, hopefully you can prevent any conflicts or misunderstandings before they occur.
Having a cosigner to help out with private student loans is a necessity for many student borrowers. However, it might not always be the right option for the borrower or the cosigner.
If they are above the age of 18, students may be able to work on building their credit score on their own and establish a consistent income to make their credit profiles attractive to lenders. This way, they can avoid having to ask around for a cosigner.
As for cosigners, if your credit score isn’t very high and your budget is tight — meaning you won’t have the funds to repay the loan if the student defaults on the loan — it might not be a good idea for you to sign on the dotted line.
However, if the student doesn’t have a lot of other options as far as covering their school expenses and you have a steady income and good credit score, then becoming a cosigner may be a way you can support your loved one.
Several private lenders advertise a student loan cosigner release benefit, which removes your name from the loan after a certain period of on-time repayment. Sallie Mae, for example, lets your student apply for cosigner release after 12 months of on-time payments, while College Ave Student Loans lets them apply after 24 months.
However, keep in mind that if you apply for cosigner release, there’s always a chance you could be rejected. There are quite a few requirements a student must meet to qualify, and lenders appear to be very strict about who can actually get cosigner release.
So while you might be able to get your name removed from the loan a year or two after repayment starts, there’s no guarantee this debt won’t show up on your credit report for the entire life of the loan.
If you find that cosigning a student loan is not the right decision for you and your loved one, consider these alternative ways to fund school expenses.
Parent PLUS Loan
The parent PLUS Loan is a form of financial aid offered by the Federal Student Aid office. This loan is available to parents to help them cover the cost of their child’s school expenses. Parents can borrow up to the full cost of attendance of their child’s school, after other financial aid has been applied. Eligibility requirements include at least half-time enrollment at a Title IV school and a good credit history.
Grants or scholarships
You won’t need to repay grants or scholarships, making them a much cheaper option than student loans. To find scholarships, you can use these search tools to track down scholarships you may be eligible for. Some scholarships are often based on academic merit; however, some scholarships are based on factors such as race, gender and the field of study you’re going into. If you’re an adult, there are grants and scholarships out there as well, specifically for those returning to school.
All of these concerns about cosigning debt are valid, as your credit, finances and even your relationship with the student could be at risk. Make sure to discuss the pros and cons of cosigning a student loan so the student understands the gravity of the situation.
As Allec suggested, you might even come up with a written agreement around student loan cosigner requirements and expectations that you can both refer back to in future years.
Since student loan cosigner release doesn’t always work out, it’s also worth exploring refinancing student loans in your child’s name. If your child has the credit and income to qualify on their own, they can refinance the loan by themselves, thereby relieving you of responsibility for the debt.
By exploring your options together, you can alleviate your concerns and make an informed decision about whether cosigning a private student loan is the right choice for you and your family.