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cosigning private student loans

A Guide to Cosigning Private Student Loans

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 do have two people signed on the loan. In 2018, more than 91% of undergraduate private student loans had a cosigner, according to a report from LendEdu, a student loan data company.

Co-signing private loan

What is a Cosigner?

A cosigner is someone who agrees to repay a loan if the student borrowing it is unable or unwilling to make payments. For private student loans, a cosigner is typically a parent or relative with a good credit score and longer credit history. The benefit of a cosigner for a borrower is that a cosigner improves the odds of loan approval and the interest rate associated with the loan.  

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.

Frequently Asked Questions About Cosigning Private Student Loans

Before asking someone to be a cosigner for your private student loans, 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?

Anyone who is over 21 and can prove independent means of income could be a cosigner, but 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. 

This means they likely have experience and success in paying down debt. Importantly, they have to be willing to take on the responsibility of being a cosigner for your private student loan. 

What are the benefits of cosigning a private student loan?

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.

What are the risks of cosigning a private 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.

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 than you. 

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 a private student loan if you haven’t made 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? You should also discuss with the student how they are planning to pay back the loan.

Then there is the loan terms and interest rate to consider. What is the highest rate you would be willing to sign for? Are there terms in the loan options that you are uncomfortable with? Making a repayment plan and deciding what is expected of you and the borrower early could save you from confusion later.

Exhaust all federal options first

As mentioned previously, the first path for a student borrower should be financial aid, scholarships, and grants. These are debt-free sources for education funding. Next, the student should take 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 much, have the student explain why they need this amount, and maybe where you could cut down on expenses to take out a smaller loan.

Get a cosigner release

Cosigner release may also be available once the student completes their higher education or if the student refinances their loan for a lower rate. Some loans offer a release after a certain amount of on-time payments have been made. 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.