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cosigning private student loans

A Guide to Cosigning Private Student Loans

Updated on April 2nd, 2019

Cosigning a private student loan is a big decision for both the borrower and cosigner, whether that person is a relative or a spouse or even a friend, as it ties their (financial) futures together closer than ever.

Today, the vast majority of private student loans have two signatories. In a report from MeasureOne, 92% of total private student loans were taken out with a cosigner.

What is a Cosigner?

A cosigner is someone who agrees to repay a loan if the primary borrower is unable or unwilling to repay it. Typically, a cosigner is a family member or close friend with a good credit score and a longer credit history. The benefit of a cosigner is that they may improve the odds of loan approval and/or lower the associated interest rate.

Lenders may ask for a cosigner if they think an application won’t be approved without the addition of another creditworthy person who is able to guarantee loan repayment.

Frequently Asked Questions About Cosigning Private Student Loans

Before asking someone to be a cosigner for your private student loan(s), or agreeing to cosign someone else’s loan, it is important to understand what it is you are asking of someone, or signing yourself up for.

Who can be a cosigner?

Any legal adult who can prove independent, sufficient means of income may be eligible to be a cosigner, however; that does not mean you should ask just anyone. Typically a cosigner is a family member or close friend that has a strong credit history with experience and success in paying down debt. Importantly, they also have to be willing to take on the responsibility of being a cosigner for your private student loan(s).

What are the benefits of cosigning a private student loan?

For student borrowers who are in school and need a private loan(s), the addition of a cosigner can improve the chances of approval and/or a lower interest rate. It is a great way for a parent, relative, or friend to help a student without directly paying for their education.

What are the risks of cosigning a private student loan?

Cosigners are liable for loan payments along with the primary borrower. For example, if the primary borrower misses a payment, the lender may require the cosigner to cover it.

It also means that the cosigner’s credit history is linked to the loan. If the loan goes into default, the credit histories of both the borrower and cosigner will be affected.

Can a borrower get student loans without a cosigner?

Only private student loan lenders or refinancing companies can require students to have cosigners. Federally guaranteed student loans, such as Stafford loans, do not require cosigners. However, a cosigner could improve your interest rate options if they have stronger credit.

Things to Consider Before Cosigning a Private Student Loan

Before you say yes to a student in your life looking for a cosigner, make sure you know what that entails. Cosigning a private student loan is a major responsibility, and it is better to lay all the cards on the table before making a decision.

Discuss finances and repayment plans with the borrower

As with any debt, you should not take out, or cosign, a private student loan if you haven’t mapped out a repayment plan. As the cosigner, will you be helping the student pay back these loans at all? If the student fails to make a payment will you be able to cover it?

Then there are the loan terms and interest rate to consider. What is the highest rate you would be willing to sign for? Are you comfortable with the loan terms? Making a repayment plan and deciding what is expected of the cosigner and the borrower prior to signing could save you from confusion later on.

Exhaust all federal options first

As mentioned previously, the first path for a student borrower should be debt-free sources for education funding; such as financial aid, scholarships, and grants. Next, if needed, the student should consider taking out federal loans. They often offer the lowest rates and many repayment options only available to federal loans.

How much can you afford to borrow?

Just because the student has a number in mind doesn’t mean you have to agree to it. Take a look at your own bank account. Can you afford the loan the student wants you to cosign?  If the financial burden is too large, have the student explain why they need this amount, and maybe where they could cut down on expenses to take out a smaller loan.

Get a cosigner release

Cosigner release may be available once the student completes their higher education or if the student refinances their loan for a lower rate. Some loans offer cosigner release after a certain number of on-time payments. Whatever the terms, make sure you know them early so you have peace of mind and an exit strategy.

Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal, financial, or tax advice.