Many lenders require a cosigner for a private student loan. This limits their risk and ensures the loan is repaid even if the borrower misses payments or defaults.
Cosigning a student loan comes with inherent risk and isn’t something to take lightly.
Here are some key questions cosigners should ask before agreeing to cosign a loan.
Why Does the Borrower Need a Cosigner?
A cosigner is often needed when the borrower has no credit or a thin credit history. This often applies to young adults who are just starting out and haven’t had time to properly build a good credit history.
Other times, it’s due to bad credit where borrowers have missed payments or have derogatory marks on their credit report.
Insufficient income is another issue when a student is enrolled in college full-time and isn’t employed or earns very little.
Or, they may simply be under the age of majority — age 18, 19 or 21, depending on the state. Private student loans are subject to the defense of infancy where borrowers can dispute their responsibility because they were underage. Having a cosigner protects lenders in this type of situation.
Cosigners will want to know the exact reasoning why the borrower doesn’t qualify for a student loan, as this can affect their risk level. Cosigning for a student who has bad credit carries more risk than cosigning for a student who has a thin credit history or is underage.
How Much Are They Borrowing?
Student loan debt can add up in a hurry. A potential cosigner should know how much the student is borrowing and the average monthly payment. The cosigner should also recognize that the student may need to borrow more money for subsequent years. Cosigning for a college senior involves less risk than cosigning for a college freshman.
What Are the Loan Terms?
Repayment options can vary, making it important to know the payment term length. Standard repayment is a fixed monthly payment and takes 10 years to repay the student loan.
Graduated repayment for private student loans is different than graduated repayment for federal student loans. A graduated repayment plan for a private student loan may involve four years of interest-only payments followed by 11 years of fully amortized loan payments.
Extended repayment involves smaller monthly payments than standard repayment but can take up to 30 years to repay, depending on the amount borrowed. This is an option for bigger student loans and may involve higher interest rates. Private lenders are more likely to allow extended repayment for variable-rate loans than fixed-rate loans.
Cosigners should know when a payment is considered late and what events will lead to a student loan default. A private student loan is in default after 120 days of non-payment. They’ll want to know if the lender has any leeway with payments like an unemployment forbearance. Finally, they should look at the annual percentage rate (APR), interest and additional fees.
It’s wise for potential cosigners to approach learning these terms like they’re borrowing the money themselves.
Can the Borrower Afford to Repay the Student Loan?
Knowing a borrower’s financial situation is a must. Here are some questions that should provide insight:
- How much money do they currently earn?
- Do they have the financial means to repay the student loan?
- Can they do so comfortably?
- What type of assets do they have?
- What will their projected earnings be after graduating?
- How likely are they to graduate?
- Would they be able to continue repayments if they experience a temporary loss of income?
If there’s any uncertainty, it’s best to decline cosigning.
Is the Borrower Responsible?
It’s also vital to examine the borrower’s prior track record.
- Are they responsible and mature?
- Are they trustworthy?
- Have they historically fulfilled their financial and non-financial obligations?
- Do they take their financial obligations seriously?
- Have there been any red flags?
Any uncertainty surrounding a student’s responsibility level could mean trouble for the cosigner. Asking these questions should provide an objective assessment.
Can the Cosigner Afford to Repay the Student Loan?
38 percent of cosigners end up paying some or all of a student loan because the primary borrower does not, according to CreditCards.com. There’s always the potential for late payments or default, regardless of how creditworthy and responsible the borrower may be.
Even a well-intentioned person may suffer a loss of income that prevents them from making repayments.
Assume for whatever reason the primary borrower can’t repay their student loan. Would the cosigner be financially able to handle repaying this debt themselves?
If not, they shouldn’t cosign.
It’s important to look at the worst-case scenario and closely examine one’s finances before making this type of commitment. Check whether making the monthly payments is feasible and how much financial strain it would create.
What Are the Risks?
A cosigner has a lot to lose. If the primary borrower misses a payment or defaults, it can hurt the credit scores of both parties. CreditCards.com reports that 28 percent of cosigners saw their credit score drop because the borrower paid late or not at all.
If a cosigner uses collateral such as a vehicle to qualify for a loan, it could be seized to repay the debt.
It should also be noted that the money lent to a student borrower counts as the cosigner’s debt on both the borrower’s and cosigner’s credit reports. In turn, they can appear as a greater risk to their own lenders and have more difficulty obtaining a loan. This means that cosigning a loan may make it harder for the cosigner to get a new credit card or auto loan, or to refinance their mortgage.
On the positive side, the primary borrower’s and cosigner’s credit history should improve as long as payments are made on time.
Therefore, it’s essential to understand all the risks before agreeing to cosign a loan.
Ask the Right Questions
Cosigning a student loan is a serious decision and carries a lot of risk. Anyone who is thinking about cosigning a loan should examine all aspects of cosigning a loan and do their research before committing to cosign the loan.
This should empower them to make the right decision.