Co-Signing On a Private Student Loan

Key Takeaways:

• Cosigners are often needed for students applying for a private student loan if the student does not have an established credit history
• Cosigners may also help students qualify for a lower interest rate on a private student loan
• Cosigners are just as responsible for the student loan as the primary borrower, which means they are responsible for the repayment of the loan if the student (primary borrower) defaults.

What is a Cosigner?

A cosigner is a person that commits to the responsibility of jointly repaying the student loan, along with the primary borrower (student). As a cosigner, you are legally taking on the obligation to repay the student loan if the primary borrower is unable to make payments. In often cases, a cosigner will be a parent, guardian, or a family member of the college student.

When is a Cosigner Needed?

If a student is not eligible for federal student loans or if the student has exhausted federal aid, then they may turn to private student loans.

A Cosigner will most likely be needed when a student is pursuing a private student loan to pay for their higher education expenses. Lenders will review the primary borrower’s (student) credit history, as well as income and debt-to-income ratio, but since most college bound students have not established credit history yet or possibly only working part time, if at all, then a cosigner will need to be added to the loan. When a cosigner is added, the cosigners credit history and other factors are also evaluated, which in turn may increase the chances of the primary borrower being approved for the loan and may also help get a lower interest rate.

Requirements for Co-signing on a Private Student Loan

1. US Citizenship or permanent residency
2. Be of legal age
3. A valid Social Security Number
4. Meeting the lender’s minimum credit requirements
5. Income or Employment verification
6. Tax returns, W2s, or other documentation

Benefits of Co-Signing on a Private Student Loan

Better Interest Rates: As a cosigner, if your credit rating is good or excellent, then the student borrower may qualify for a better interest rate, which in turn could mean a lower monthly payment and less interest accrual over the life of the loan.

Student Becomes a Beter Loan Candidate: Students who would not qualify on their own due to their own income and credit would only be eligible to obtain a private student loan with a cosigner.

Student can Build Credit: Since most students who have just graduated from high school have not established credit, establishing a history of on time student loan payments may allow the student to build credit history. Building their credit could help the student in the future with renting an apartment, qualifying for bigger purchases that may require financing, and otherwise reach other financial goals later in life.

Loan Terms that Fit Your Needs: Private student loans are not all the same and the terms are dependent on the lender. As a borrower, you can shop around for lower interest rates and loans that may offer benefits that work for you.

Disadvantages of Co-Signing on a Private Student Loan

Credit Impact: There will be a hard pull on your credit when you apply for a student loan as a cosigner, which will impact your credit score. Also, if you are approved, the loan will show in your credit which will increase the debt in your debt-to-income ratio which could impact your ability to qualify for other large purchases in the future. The loan will be included in your credit reports, any missed or late payments are kept on your report for up to seven years by the credit bureaus.

Increased Financial Responsibility: As the cosigner, you are jointly responsible for the repayment of the student loan. If the student is unable to make payment you will be held liable for the loan’s obligations. Any missed or late payments will negatively impact your credit score. You could also be held responsible for any applicable legal fees, if there are any legal implications.

Relationships can Become Strained: If you’ve worked hard to build a good credit score, and the student borrower fails to make payments, your credit will be negatively impacted. Frustration of their irresponsibility to repay the loan could cause friction in your relationship, which can damage family dynamics.

Payments may be Due as soon as the Loan is Disbursed: Some private lenders will require payment as soon as the loan is disbursed, and therefore, if the student is not working or cannot afford the payment while in school, the payment will still be the cosigner's responsibility.