Sometimes, federal student loans aren’t always enough to pay for a college education. And that is even after savings, scholarships, grants, and other contributions. When that happens, consigning a student loan seems to be the logical step. But is it the right step you should take? Cosigning a student loan will affect your credit history as a parent, relative, etc. And besides, you can’t ensure that your student will earn enough income after they graduate to pay off their student loans themselves.
Yes, having a cosigner improves students’ approval chances. But that comes with significant risks. So if you’re planning on cosigning a student loan, this guide will show you everything you need to know before proceeding.
With that said, let’s begin.
6 Things To Consider Before Cosigning A Student Loan
1. Make Sure All Federal Loan Options Are Exhausted
Ensure that the student has applied for every federal aid they qualify for, including grants, scholarships, work-study, and other federally supported loans, before turning to a private loan.
Federal student loans don’t need a cosigner and include consumer protections such as the opportunity to extend or defer payments if you’re having financial difficulties.
Federal loans, on the other hand, have limitations. For example, students who are financially reliant on their parents can borrow between $5,500 and $7,500 each year, depending on their academic year, but no more than $31,000 for undergraduates.
Independent students can withdraw $9,500 to $12,500 every year, for $57,500.
If it isn’t enough to cover the total attendance cost, the student’s parent or guardian can take out a Parent PLUS loan to make up the difference.
A PLUS loan is entirely in the name of the student’s parents. On the other hand, Parent PLUS loans have more flexible repayment alternatives than private student loans, and only a minimal credit check is required.
So it’s safe to say that federal student loans are a better option if you want to be a cosigner.
2. Interest Rates Can Rise When Cosigning A Student Loan
The monthly payment is predictable because the interest rates on Parent PLUS loans and federal student loans are fixed. Private student loans often offer variable interest rates that are lower than those charged by government loans because of today’s low-interest-rate climate.
However, because student loans have periods of ten or more years, variable rates can increase, causing monthly payments and the total amount owed to skyrocket. So if you’re cosigning a private loan, keep an eye out for fixed-rate loans offered by some institutions.
Many private loans have repayment requirements that must be met as the student is still in school. Due to a six-month grace period on federal student loans, repayment doesn’t begin until six months after graduation.
Don’t limit your search to bank lenders. Student loans are also available through states and credit unions.
There’s no assurance that those will be the best. And that’s why you have to shop around to find the best one that suits your current situation.
3. Cosigning Can Greatly Affect Your Purchasing Power
When you cosign a student loan, your debt-to-income ratio rises. So remember this if you intend to purchase a new home or take out a line of credit during the student loan term.
Make a list of any additional finance you’ll need during the term of the cosigned loan. Then consider whether you’re willing to forego extra funding during this period.
4. Your Credit Might Be Affected
When the student misses payments on private student loans, It’ll appear on your credit report as a cosigner. That’s because the credit agencies record any repayment activity. Because lender regulations differ, you may receive a notification when the primary borrower’s account gets into default or misses the first payment.
Late payments result in late penalties, which can hurt your credit. In other words, you’re paying more on your loan than you intended. And even one late payment can put your eligibility for cosigner release on the student loan on hold.
Find out from your lender if your contact information can be included in the account. Make sure you request online account access for account status and bill payment notifications.
5. Get A Cosigner Release
A cosigner release clause is included in some loans. For example, you may be able to remove your name off the loan after a certain number of on-time payments or when the student borrower gets a specific credit score.
This clause can also safeguard the primary borrower. The debt is instantly put into default if the cosigner files for bankruptcy or dies, and it must be repaid completely. The release can prevent this, but it doesn’t do so automatically.
You must maintain track of timely payments and seek release once all requirements have been completed.
It can be challenging to get the release. Only about 10% of borrowers who request a cosigner release are approved.
You can improve your chances by enrolling the primary borrower in automated payments. That will make sure they never miss a payment.
Another good strategy is to apply for the release only after the monthly payment drops to 10% or less of the student’s monthly gross income. That will show that they can comfortably make payments.
Another alternative is to refinance your private loans with a different lender, which will relieve you, the cosigner.
Cosigner Release Doesn’t Work For International Students
The student must be a US citizen or permanent resident at the request for cosigner release.
After completing their studies, international students must go back to their home country. The lender believes that they’ll not obtain the monies owed to them without a cosigner.
So before you sign the promissory note, read the conditions for a cosigner release and contact your lender with any queries.
6. The Student Might Not Need A Cosigner, So Verify
Your student may not need a cosigner if they satisfy the income standards and have a solid credit history. However, with a cosigner, they might be able to get a better loan rate and terms.
Even if it involves a higher interest rate, ask your student if they may qualify for the loan without a cosigner. If the student can be eligible for a student loan on their own, they should shop around for a cheaper interest rate if you don’t want to cosign a student loan.
The Right Time To Consider Cosigning A Student Loan
Being a cosigner is a good idea if the student is applying for private student loans with a strong payment history and a high-interest rate of 8% or higher. If you have good credit, participating as a cosigner can help them get a lower interest rate, which reduces the loan’s overall costs.
Ideally, you’d use your good credit to get a better rate and increase your chances of approval. But, unfortunately, the reality is that life occurs, and neither you nor the student knows what would happen in the future, like a job loss or massive expense.
But consigning a student loan can get complicated. Let’s find out more in the next section.
Cosigning A Student Loan: When Situations Complicate The Matter
When you sign a loan as a cosigner, you may think that you are simply using your credit to help the primary borrower get a loan. However, some circumstances can make things more difficult.
For example, if you cosign a spouse’s student loan and then divorce, you’ll still be liable for the debt. Your name will remain on the loan debt, and if your ex fails to make a payment, your credit may suffer.
The good news is that if the primary borrower dies unexpectedly and you cosign a federal student loan, you will receive a death discharge. However, it may be different if the principal borrower died or you cosigned a private student loan.
One approach to protecting yourself is to purchase a life insurance policy on the primary borrower for the amount of the student loans, which will cover the loans in the event of death.
You’ll also want to verify if the student qualifies for cosigner release. To be accepted for cosigner release, the principal borrower must demonstrate the ability to pay and have acceptable credit, according to the lender’s standards.
How Cosigning A Federal Student Loan Works
All undergraduates, including graduates applying for Direct Unsubsidized Loans, can apply for federal loans without a cosigner. However, graduate students must undergo a credit check for grad PLUS loans. You’ll need an endorser who acts as a cosigner on the loan if you have a bad credit history.
If students’ Direct subsidized and unsubsidized loans have been exhausted and require more funds to pay for school, a federal Parent PLUS Loan can help. As a parent borrower, you can use PLUS loans to pay for your child’s undergraduate education up to the overall attendance cost.
On the other hand, Parent PLUS Loans do require a credit check. PLUS Loans feature the same fixed interest rates for all borrowers, regardless of income or credit.
Federal PLUS Loans feature the highest interest rates of any federal loans, with a 5.3 percent interest rate for loans between July 1, 2020, and July 1, 2021. In addition, PLUS Loans include a disbursement fee of 4.236 percent.
You, not the primary borrower, are the borrower of the student loan debt with a Parent PLUS Loan. That means you are entirely liable for the loan’s repayment.
How Cosigning On Private Student Loans Work
Unlike federal student loans, private loans are issued by credit unions, banks, and online lenders. So instead of filling out a FAFSA, you submit a loan application to apply for private student loans. This application looks at your credit score, income, credit history, and employment history to decide whether you qualify and what rate you’ll get.
You’ll need a cosigner if you don’t fulfill a lender’s credit criteria, so most students who take out a private student loan do so with a parent or other relative. When you submit your application, you must include the cosigner’s information.
Pros And Cons Of Cosigning A Student Loan
Advantages Of Cosigning Student Loans
- You can help the student in obtaining a lower rate. For example, the primary borrower can qualify for a lower interest rate on a loan and save money over time by adding a cosigner to their application.
- You increase the student’s likelihood of getting a student loan. Usually, private lenders require a debt-to-income ratio, minimum income, and credit. And it’s not likely that the primary borrower can meet those requirements.
- The primary borrower can establish credit. By assisting the student in obtaining a loan, they can establish a credit history. The lender will report their payment activity to the major credit bureaus as they make loan payments. The loan can help them improve their credit score over time.
- The student might be eligible for a bigger loan. While private lenders offer non-cosigned loans, their lending maximums are typically smaller. You ensure that your child receives the total money due for school by cosigning.
Disadvantages Of Cosigning A Student Loan
- You won’t get cosigner releases from every lender. Cosigner releases are available from some private student loan lenders, but not all. You may be required to remain a cosigner for the loan’s repayment term or until it is paid off. Alternatively, if the student has proven their creditworthiness, they may be able to refinance their student loan after graduation. Then, you can be removed from the refinanced loan if the application is approved following underwriting.
- The payments are your responsibility. If the student defaults, you, as a cosigner, are responsible for making payments. If the primary borrower fails to make the monthly payments, you will be responsible for them.
- Your credit score could be affected. For example, if the student stops paying payments and doesn’t realize it, your credit score could suffer, and the account could be placed in collections.
- Your ability to obtain other forms of credit may be harmed due to the loan. Cosigning a student loan could raise your debt-to-income ratio if you plan to apply for different types of credit, such as a vehicle loan (DTI) or home mortgage. You may not be eligible for additional lines of credit if your DTI is too high.
Getting Student Loans Without A Cosigner
Applying for a federal loan is your best option for receiving a student loan without a cosigner. If you need to apply for a private student loan without a cosigner, you’ll need to make sure you’re in excellent financial standing.
Here are some practical ways to increase your approval chances:
- Make on-time payments on credit that you already have. Make your credit card payments on time or before the due date. This demonstrates your trustworthiness and will help you improve your credit score.
- Don’t overspend on your credit card. There is a maximum credit limit on every credit card. If you consistently use the total amount, it will negatively influence your credit score. To be considered a safe borrower, it is advised that you use 30% or less of your credit limit.
- Establish a reliable source of income. Many lenders require a minimum annual income, but they also prefer borrowers who have a consistent source of income.
- Look for a lender that has fewer restrictions. Some student loan providers want to make it easier for students with poor credit to get student loans. These loan lenders can look at your major, future earnings potential, and school records to determine whether you qualify for a loan.
Consider all of your options before cosigning a student loan. Ensure the student is responsible and can help pay back the student debts. Remember that you could end up taking all the responsibility. So do everything you can to ensure that the risk isn’t too much to handle.
Final Thoughts
It can be challenging to decide on cosigning a student loan with insufficient or limited information. You can also be conflicted between helping the student and reducing the financial risk.
Furthermore, you place yourself at emotional and financial risk when you cosign a student loan. When the primary borrower defaults on payments, it’ll damage your credit history and ruin the relationship’s trust.
So before cosigning a student loan, you need lots of factors, which are outlined in this guide. Use that to help you make the right decision.
