Cosigning a 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.
Typically, lenders will ask for a cosigner when they think the application won’t get approved without the addition of another creditworthy person who is able to guarantee the loan and payments.
If you’re a borrower and you’re asked to have a cosigner — or you’re being asked to cosign — you’re not alone.
The vast majority of private student loans do have two people signed on the loan. In 2015, more than 88% of all private loans (both undergraduate and graduate programs) had a cosigner, according to a report from MeasureOne, a student loan data company.
What does it mean to be a cosigner on a student loan?
Cosigners are liable for the payments along with the primary borrower. For example, if the primary borrower misses a payment, the lender will come to the cosigner for money.
It also means that the cosigner’s credit history is now linked to the loan. If the loan goes into default, the credit histories of both the borrower and co-signer will be affected.
Only private student loan lenders or refinancing companies can require students to have cosigners. Federally guaranteed student loans, such as Stafford loans or Perkins loans, do not require cosigners.
Cosigning Can Help Access Lower Rates
For student borrowers who are in school and need private loans, the addition of a cosigner can improve the chances for approval or mean a lower rate with a private loan.
“It is a great way for a parent to help a child without directly paying for their education.”
“The difference in interest rates can be significant over the long run and is a great way for a parent to help a child without directly paying for their education,” says financial advisor Anjali Jariwala, founder of FIT Advisors in Chicago.
“Down the line when the child is earning income, she can refinance her debt in her name only and the parents will no longer be on the hook for the debt.”
Even with refinancing, a cosigner can also help an applicant to get approved for a new loan. Refinancing student loans typically saves the borrower money with a new loan at a lower APR.
Parents might also decide it’s worth cosigning if that is realistically the only way their child can go to college or graduate school without the parent outright borrowing money themselves, says Catherine Seeber, a principal at Wescott Financial Advisory Group LLC in Philadelphia, Pa.
Cosigner release may also be available once the student completes their higher education. Some loans offer a release after a certain amount of on-time payments have been made.
Financial advisors emphasize it’s important for parents and students to explore all their financial options when deciding how to pay for education and that includes federal loan offerings, financial aid, and scholarships, as well as private student loans.Disclaimer: This blog post provides personal finance educational information, and it is not intended to provide legal or tax advice.