Should I Cosign a Private Student Loan?
Cosigning your child’s private student loan can help them get approved. Having a creditworthy cosigner can also mean your child will qualify for a lower interest rate. However, cosigning a student loan can have severe consequences. Cosigning a loan means a responsibility and commitment until the loan is paid in full, which could take several years. Here are the pro and cons of cosigning a student loan and what you need to consider.
The Risks of Cosigning a Student Loan
You are a co-borrower. You are legally responsible for repaying the student loan, even if the borrower decides not to pay. Almost 40% of cosigners end up paying some or all of a student loan because the borrower can’t pay. It is almost impossible to file for bankruptcy on a student loan.
Your credit is impacted. The student loan debt is reported as your debt on your credit history, too. If the borrower misses a payment or defaults on the student loan, this is reported on your credit.
Cosigning can impact future purchases. If you’re planning on purchasing a home or refinancing a mortgage, it could potentially reduce your chances of approval.
Not paying means consequences. If you and your borrower don’t make payments, there are other negative implications. If you don’t pay your student loans, your loan might be sent to a collections agency, collection charges of up to 40% might be added to the loan balance, the lender might sue you to collect on the debt, up to 25% of your wages might be garnished, the lender might be able to seize your assets (e.g., bank levies) or place a lien on your property, and more.
Reasons to Cosign a Student Loan
Help the borrower get approved: Most college students (more than 90%) need a cosigner to even qualify for a private student loan, often due to a limited credit history.
Help them save money: Even if the borrower can qualify for a student loan on their own, if you have very good credit, cosigning can help them score a lower interest rate. This ultimately saves them money on the student loan.
Improve your credit: While your credit could be negatively impacted by missed payments, it can also be improved by on-time payments. Your credit can actually see an improvement if payments are made on-time every month.
Some lenders offer a cosigner release: A cosigner release is when you, as the cosigner, are no longer tied to the loan. Qualifying for cosigner release includes making a certain number of consecutive on-time payments and the borrower satisfying the lender’s credit criteria on their own.
Borrowers can refinance to release you from the loan. Another option for removing you from the responsibility of the student loan is for the borrower to refinance their student loans on their own after graduation. Once the borrower has graduated and has a steady job with a regular income, they may be able to refinance for a lower interest rate. Not only can this save them money and simplify repayment, you will no longer be responsible for repaying their loans since the refinanced loan is a completely new loan.
Things to Consider Before Cosigning a Student Loan
There are questions cosigners should ask and things to consider before signing the dotted line, including:
Confirming the borrower has exhausted all other options. Has the borrower filled out the FAFSA and already taken advantage of all federal student aid options, including grants, scholarships and federal student loans?
Completely understand the loan. What is the total amount owed? What is the interest rate? Keep in mind that while variable interest rates might be tempting because they are low, they can increase over time. What will the average monthly payment be? In some cases, when you sign the loan’s promissory note, it allows the borrower to take out additional loans, too. It’s imperative to fully understand all the loan details and the agreement.
Understand the borrower’s likelihood of repaying. Have an open and honest conversation with your child about the amount they are borrowing compared to their projected earnings after graduation. Explore together what is the job outlook for their prospective career. Consider your child’s characteristics, such as their maturity, trustworthiness and responsibility, as well.
Know options if the borrower can’t repay. Does the lender offer the option for a temporary deferment for times of unemployment or economic hardship?
Have a game plan with the borrower. Ask the borrower to sign up for automatic payments. This helps reduce the chance of missed payments. Plus, it often means the interest rate is reduced by a small percentage. Know the due date and confirm that the borrower is making on-time payments.
Qualifications for Cosigning a Student Loan
A cosigner can be a parent, grandparent, aunt or uncle, sibling or even someone not related to the borrower at all.
Cosigners should have the following:
- Good credit, typically at least a 620 FICO score, with a 780 or better preferred
- Steady income
- Low debt-to-income ratio
- History of making payments on-time