If you need a private student loan for college, you probably also need a cosigner. Only about ten percent of undergraduate students can qualify for a private student loan on their own, according to the Consumer Financial Protection Bureau. Apart from helping you secure the loan, having a financially responsible cosigner may also reduce the interest rate on your private student loan.
Requirements a Cosigner Must Meet
Typically, most students ask a parent, other family member or a friend to be the cosigner.
Before you ask anyone to take on this responsibility, you need to know who can cosign a loan and what being a cosigner entails.
To be eligible, a cosigner must:
- Be a citizen or legal permanent resident of the United States.
- Be of legal age (18, 19 or 21, depending on the state).
- Have a very good or excellent credit history. Lenders prefer a credit score of 780 or higher. A higher credit score generally yields a lower interest rate.
- Have worked for his/her current employer for at least several years.
- Have a verifiable income large enough to repay the debt if necessary.
Some lenders also ask how long the cosigner has lived at his or her current address.
Unless the person you ask to be your cosigner is a relative or close friend, you may not know whether he or she has the financial wherewithal to pay off the debt if necessary. Forget about your job-hopping uncle or your friend who pays the minimum allowed on her credit card balance each month. However much they might like to help, neither is an acceptable candidate to become your cosigner.
Responsibilities of the Cosigner
Your would-be cosigner’s duties don’t end when you receive the loan. Far from it; that’s just the beginning. The cosigner signs on for the life of the loan and shares equal responsibility with you for its repayment. Even if you drop out of college, the cosigning relationship still exists. You and the cosigner have an equal obligation to make payments on the loan and cover any past due amounts, including interest and any other fees that may have accrued. It’s important for your cosigner to know these facts before accepting the responsibility.
What to Look for in a Cosigner
It’s obvious that your cosigner assumes risk by cosigning your loan, but you have some risks too, especially if you don’t choose your cosigner wisely. The lender may not be concerned with the age or health of your cosigner, but you should be. If you choose someone who is in poor health, you could be in for trouble down the road. Why? Some lenders include a clause in your student loan agreement that the loan must be paid in full upon the death of your cosigner.
Another possibility is that, just because your cosigner died, the lender could place your loan in default even if you’ve made all the payments on schedule. Some lenders do this automatically if the cosigner dies. You don’t want this to happen because it plays havoc with your credit rating.
Making Your Pitch to a Potential Cosigner
Sometimes a family member or friend is unable or unwilling to be a cosigner. Regardless of their relationship to you, people who themselves are poor credit risks aren’t eligible. Others who are eligible may simply not want to get involved. How do you convince someone to become a cosigner?
Tell your prospect why you need a cosigner. Explain that having a cosigner increases the chance of your getting the loan and that the loan is less expensive with a cosigner because the interest rate is lower. Tell him or her that you are not borrowing more than you need and that you will be able to repay the loan based on your chosen occupation.
Be honest about the cosigner taking on risk. To show that you’ll be able to repay the debt, calculate your monthly loan payments and estimate your monthly income after you graduate. If in the past, you saved to buy something you couldn’t afford outright, mention that. The idea is to show that you have experience in managing money responsibly. Also, tell the prospective cosigner that you take responsibility for making all monthly payments on time. Better yet, draw up a contract to be signed by you and the cosigner before you approach him or her. This shows that you don’t take the commitment lightly.
If the lender offers a cosigner release option, mention to the cosigner that you will apply for cosigner release as soon as you are eligible.
Beware of Advanced-Fee Loan Rip-Offs
There are websites that purport to pair up borrowers with cosigners. Some do, but for a cosigner fee that ranges from five percent up to twenty-five percent of the loan amount. Worse, if you pay in advance, they disappear without cosigning the loan. Worst of all, however, is that some scammers ask for personal information, even including your date of birth, Social Security Number and bank account numbers. This information provides them with the potential for identity theft.