Should You Cosign a Student Loan?
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- Having a student loan cosigner makes it easier to get approved for private loans.
- A cosigner is responsible for the loan if the borrower can no longer pay.
- Most federal loans do not require a cosigner.
- Cosigning a student loan will affect your credit score.
After exhausting federal loans and finding they need more help paying for school, students often turn to private loans. A typical college student might not have the credit score needed to secure one of these loans on their own. Therefore, they need the help of a cosigner.
When cosigning a student loan, you allow a borrower to use your credit history as a fail-safe for the bank to secure funds. While beneficial to the student, cosigning a student loan may not always be in your best interest.
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What Is Cosigning?
Young people or adults who don't have the best credit history often need help securing loans to make large purchases such as cars and houses. The cosigner — usually a parent, guardian, or another family member — uses their credit history to help the borrower secure funds.
If the borrower can no longer make payments, the cosigner is legally responsible for paying off the student loan. While a cosigner has no ownership of the funds, they accept the risks on behalf of the borrower.
What Does a Cosigner Do?
A cosigner helps a borrower get a loan they wouldn't be able to secure on their own. A loan with a cosigner often has a lower interest rate and monthly payment. While this is helpful to students, a cosigner takes on risks without much personal benefit.
If a borrower doesn't make their loan payment, the cosigner is legally responsible for paying the debt. Credit agencies can sue cosigners for defaulted loans. Along with hits to their credit due to missed payments, a loan cosigner also risks their income-to-debt ratio, which makes securing future lines of credit more difficult.
Do You Need to Cosign for a Student Loan?
Sending a child or dependent to college takes a lot of planning. For most federal student loans, a cosigner is not necessary. Cosigners are generally only needed for private student loans for college costs outside of your savings and financial aid.
Complete the FAFSA
Students should make sure they have completed their Free Application for Federal Student Aid (FAFSA) before considering private student loans. Completing or updating a FAFSA allows students to see what federal grants or scholarships they are eligible for. This can significantly reduce the cost of college (and, therefore, the amount of debt you have to take on).
Filling out the FAFSA is also how students qualify for federal student loans, which are generally considered more advantageous than private student loans. Federal loans often have a lower interest rate and better repayment options. Students and parents can also apply for a PLUS Loan, which requires a cosigner, through the FAFSA.
Consider Private Loans Without a Cosigner
Not all private loans require a cosigner. These loans usually have higher interest rates, and you should only consider them after exploring all federal loan options.
While the credit requirements might be lower with these types of loans, you still might need an income and a couple of years' worth of "good" credit history.
Should You Cosign a Student Loan?
Money is known to be a strain on relationships. You want to help your student pay for college, but there are many things to consider before cosigning a loan.
How Is Your Credit?
A good credit score is a basic student loan cosigner requirement to consider. You'd need a score of at least 670 to cosign on most private student loans. Keep in mind that the student's ability to make payments on the loan and your debt-to-income ratio will impact your credit.
Do You Have a Stable Income (And Will You)?
By cosigning, you're responsible for paying the loan if the student can no longer make payments. You should only cosign a student loan if you have and will continue to have a stable income for the entire duration of the loan. A good rule of thumb when cosigning a loan is to be able to take on the monthly payments under your current household budget.
Do You Plan on Purchasing a House or Car?
Cosigning a student loan will impact your debt-to-income ratio until the loan is paid in full. If the debt is too high compared to your income, that could impact your credit score. In that case, you may have trouble securing a car or home loan (or another type of loan) after cosigning. Make sure you consider any large purchases you hope to make in the future.
Is Someone Else in a Better Position to Cosign a Student Loan?
A student loan cosigner does not have to be the student's parent or legal guardian. Anyone with a good credit score and a steady income can cosign any loan. The cosigner should trust the student borrower and prepare to step in and make payments if the student cannot.
Can You Be Removed as a Student Loan Cosigner?
The process isn't sure-fire, but in some cases, you can be removed as a cosigner on a student loan.
Removal Process After a Good Payment History
To begin the process of removing yourself as a cosigner, the borrower needs to be on board and have made a certain number of payments. The number of payments depends on the size of the loan and the lender. Other factors include the borrower's age and income.
A 2015 Consumer Financial Protection Bureau report found that 90% of cosigners were denied their request to be released from a loan. Do not let this discourage you from applying to be removed as the student loan cosigner. If the borrower meets the requirements, it doesn't hurt to try.
Refinancing a Student Loan
By refinancing a student loan, you take out a new loan in place of the old one. The new loan will hopefully have a better interest rate, and, depending on the borrower's income and payment history, you could be off the hook as the cosigner.
Make sure the borrower compares offers from numerous lenders before refinancing.
DISCLAIMER: The information provided on this website does not, and is not intended to, constitute professional financial advice; instead, all information, content, and materials available on this site are for general informational purposes only. Readers of this website should contact a professional advisor before making decisions about financial issues.