The Cosigner’s Guide to Student Loans

Cosigning a student loan is a pivotal step in the journey of financing higher education. The cosigner, often a trusted individual like a family member or close friend, assumes shared responsibility for loan repayment. This move can strengthen the borrower’s chances of approval and secure more favorable loan terms.

But this deal isn’t without its risks. These include:

• Late or missed payments: These could negatively impact both the borrower’s and cosigner’s credit scores.

• Loan default: If the student borrower defaults, the cosigner may have to shoulder the entire repayment burden.

Given these potential risks, understanding the obligations and implications of becoming a cosigner is crucial.

Ahead, we’ll dig into the role of a cosigner, highlighting the benefits, drawbacks, and responsibilities associated with cosigning a student loan.

Not everyone is eligible to cosign on student loans. Lenders use certain rules to decide who has good enough credit to be a cosigner. So, who can cosign a loan for a student?

1. Credit History: A cosigner should have a good record of paying bills on time. This means they should have a history of meeting their credit obligations promptly. Typically, a credit score of 670 or higher is required.

2. Steady Income: Lenders often require a cosigner to have a steady source of income. This reassurance ensures that the cosigner can take over the loan payments if the student borrower is unable to do so.

3. Citizenship Status: Generally, a cosigner should be a U.S. citizen or a permanent resident. Some private lenders may allow non-U.S. citizens to cosign a loan, but they will likely require a U.S. address.

Don’t forget that cosigning a student loan is a big deal that you shouldn’t take easily.

The creditworthiness of a cosigner can have a big impact on a student’s loan choices, but it also puts the cosigner’s own finances at risk.

Cosigning a student loan, be it a private student loan or a government one, is a considerable financial commitment. Here are a few key impacts that potential cosigners should consider:

1. Credit Score Impact: The cosigned loan appears on your credit report, just like any other debt. Consequently, if the primary borrower misses a payment or defaults, it could negatively affect your credit score. Conversely, timely payments by the borrower could improve your credit score.

2. Reduced Borrowing Capacity: Cosigning affects your creditworthiness and borrowing capacity. Future lenders, whether credit unions or entities like Sallie Mae, will consider the cosigned loan as part of your overall debt obligations. This may reduce your eligibility for future loans and affect your borrowing options.

3. Shared Repayment Responsibility: Most importantly, as a co-signer, you share equal responsibility for loan repayment. If the student defaults or fails to meet payments, you bear the financial responsibility, which could pose a significant strain if you’re not prepared.

Before you sign your name on the promissory note, make sure you know the cosigner requirements. My advice? Don’t cosign anything. But if you’re going to do so for a student loan, do it only if you believe that the borrower will be able to pay it back and you’re prepared to step in when they can’t. That means having difficult questions with your college student about:

• The cost of attendance

• Their financial aid package

• Their future income

• Your personal finances

• The estimated monthly payments

Related: Student Loan Cosigner Bankruptcy: How it Works

Parents play a key role in helping their child get money for college. One big way they help is by cosigning private student loans, especially when their kid doesn’t have enough income or credit. Cosigning:

• Fulfills lenders’ credit requirements

• May lead to lower interest rates

• Can secure better repayment terms.

But if you don’t want to cosign or don’t have a good credit score, the Parent PLUS loan is another choice. It’s a type of federal student loan in which the parent is the main borrower. These loans:

• Don’t require a cosigner

• Involve a credit check and specific eligibility criteria

• Require the completion of the Free Application for Federal Student Aid (FAFSA).

While Parent PLUS loans come with fixed interest rates, often higher than private loans, they provide unique benefits such as loan forgiveness and flexible repayment options.

In both scenarios — cosigning a private loan or applying for a Parent PLUS loan — parents’ credit histories will be thoroughly scrutinized. Elements such as timely payments and past late payments will influence the loan application.

The best student loan for a family depends on their unique financial situation and the student’s educational needs. Hence, a thorough understanding of each loan type, careful consideration of the implications, and a strategic repayment plan can guide the right decision.

A cosigner isn’t permanently bound to a student loan. Many private lenders offer a cosigner release option after a certain period of timely payments. To get a student loan cosigner release, the student borrower needs to meet certain criteria:

• Steady income

• On-time payment history of at least 12 months

• Low debt-to-income ratio (low credit card balances, limited personal loans, and so on).

Most of the time, this process starts with an official application, where the lender reevaluates the primary borrower’s creditworthiness. Before signing a loan deal, it’s important to know exactly how the lender will let your cosigner off the hook.

In case of financial difficulties, deferment, and forbearance options may be available:

• Deferment: Temporarily stops payments without accruing additional interest on subsidized loans.

• Forbearance: Pauses payments, but interest continues to accumulate.

Post-graduation, graduate students with a strong credit profile may consider student loan refinancing for a lower rate. This can potentially:

• Reduce the interest rate and loan amount

• Remove the original cosigner.

But keep in mind that refinancing a federal loan into a private one forfeits federal loan benefits, such as income-driven repayment plans and loan forgiveness options. Therefore, explore all options and understand the implications before making a decision.

Student loans come in several types, each with its unique features, eligibility requirements, and advantages. There are two main categories: Federal and Private.

Federal Student Loans are offered by the U.S. Department of Education. They include:

• Direct Subsidized Loans: Available to undergraduate students demonstrating financial need. The government covers interest payments under specific conditions.

• Direct Unsubsidized Loans: Available to undergraduate and graduate students, regardless of financial need. The borrower handles all interest payments.

• Parent PLUS Loans: Non-credit-based loans that allow parents to cover their dependent undergraduate children’s educational expenses. It requires a credit check and doesn’t necessarily require a cosigner unless the parent has an adverse credit history.

Private Student Loans are provided by private lenders such as banks and credit unions. Key characteristics include:

• Variable APRs.

• Credit requirements.

• Possible origination fees.

• Cosigners can assist in approval or securing a lower interest rate.

• Refinancing options to potentially better loan terms.

Always carefully review loan terms and consult a financial advisor. The optimal financing method depends on individual circumstances and long-term financial goals.

Cosigning a student loan carries both benefits and drawbacks for the student borrower and the cosigner.

Benefits of Cosigning:

• A creditworthy cosigner can enhance students’ loan options and potentially secure lower interest rates, reducing total repayment amount over time.

• Cosigning may allow students to refinance their loans later, possibly achieving more favorable terms.

Related: Can Cosigning a Student Loan Affect Your Ability to Buy a Home?

Drawbacks of Cosigning:

• Cosigners share equal responsibility for loan payments. If payments are missed, both the cosigner’s and student’s credit scores could be affected.

• Cosigning impacts the cosigner’s debt-to-income ratio, which might affect their ability to obtain future loans or credit.

• For student borrowers, having a cosigner might mean less motivation to build a strong credit history independently.

• Cosigning can potentially strain personal relationships over time, as the cosigner is legally obliged to repay the loan if the student defaults.

Related: Can the Cosigner Sue the Primary Borrower on a Student Loan?

Before you decide to cosign a loan or ask someone else to, you should know what it means and what could happen.

Credit and income are key factors in the student loan process, impacting both the borrower and cosigner.

Role of Credit:

• A cosigner’s established credit history benefits the borrower. Lenders see a cosigner with good credit as a secure option, reducing their risk and potentially leading to lower interest rates and more flexible repayment terms.

• The cosigner acts as a safety net, reducing the lender’s risk if the student borrower fails to meet their obligations.

Role of Income:

• The student borrower’s debt-to-income ratio and income requirements are crucial. Lenders evaluate this ratio to assess the borrower’s ability to manage monthly loan payments.

• A high debt-to-income ratio might raise concerns about the borrower’s ability to meet loan payments, making it difficult to secure a loan without a cosigner. A low ratio suggests the borrower can manage loan repayments along with other financial obligations.

• Lenders may set income requirements to ensure the borrower has a steady income source. Full-time students may find it challenging to meet these criteria, underlining the value of a creditworthy cosigner.

A cosigner can significantly improve a student loan borrower’s prospects in several ways:

Lower Interest Rates:

• A creditworthy cosigner can help achieve lower interest rates on the loan.

• Lenders see cosigners with good credit as reassurance that the loan will be repaid on time. This reduced risk could result in lower interest rates, meaning less money paid over the loan’s life.

Increased Loan Eligibility:

• Many students lack the credit history or steady income to qualify for a loan independently.

• A cosigner with an established credit history and regular income can offset these limitations, increasing the borrower’s access to different loan options.

Related: Student Loan Cosigner Rights

Improved Loan Terms:

• A cosigner’s strong credit profile could lead to more favorable loan terms, such as higher loan amounts or flexible repayment schedules.

• This can be especially helpful if the student needs additional funds to cover tuition, room, board, or other educational expenses.

A cosigner, like a parent, grandparent, or other person with good credit, can help a student borrower get a better loan and make sure they have the money they need to finish school.

Related: What Happens If a Cosigner on a Student Loan Dies?

When you cosign a student loan, you can get lower interest rates and better loan terms, but you also take on a lot of risks and duties. A cosigner must have a good credit background and a stable income to be eligible.

Always keep in mind that cosigning affects your credit and makes you responsible for paying back the loan. Before agreeing to cosign a student loan, you should carefully look at your finances and think about all the pros and cons.