How Does a Cosigner on Your Private Student Loan Affect Your Approval and Interest Rate?
Private student loans are unlike federal student loans. Getting a federal loan is straightforward and the terms and interest rates are the same for all applicants and, very importantly, a cosigner is not required. The only time you need someone else is if your parents apply for a PLUS loan to help you. But with private loans, lenders base their loan approvals and lending decisions on credit risk. Most students have little or no credit to offset the risk and so a cosigner is often required. In fact, according to the Consumer Financial Protection Bureau (CFPB). 90% of private student loans have a cosigner, so this is a very important aspect of this type of educational debt.
As a student, you likely have little credit history to speak of so your credit score is low. In addition, you have no income coming in and debt piling up. If you are turning to private student loans, you may have already maxed your federal loans. This equals a lot of debt for a person with no degree in hand and no career track record. A cosigner offers the lender stability and offsets the risk you present as an unknown commodity.
Private student loan lenders want you to present a cosigner with a good credit history and a score of (preferably) 720 or more. Less than that and you may not be approved or will have higher interest. The lender will want someone with a stable work history and a verifiable steady income. Age and health matter because they want to know the cosigner will be around for years to come.
It’s not just your parents or step-parents that can serve as a cosigner. Your spouse, a cousin, brother, sister, aunt, uncle, friend or anyone who is willing to take a risk on you and has the income and credit score to qualify can cosign for you. The lender won’t care what your relationship is so long as the cosigner is credit worthy and will sign on the dotted line!
As a borrower, the best cosigner for you is the one that has the best credentials that will get you the most advantageous loan terms possible. This means the highest credit score, most substantial work history, good income and all the other criteria mentioned above that private student loan lenders are looking for.
The risks to your cosigner are many. If you fail to pay the loan, they are on the hook. If you die before paying it off, they will likely be on
the hook. If you don’t graduate, you will likely struggle to pay your debt – that’s a risk. If the cosigner, in turn, can’t pay the loan, they will be pursued for the full amount and will be subject to collections activity up to and including lawsuits and garnishment. It’s a serious step.
The best way to encourage someone to cosign with you is to demonstrate responsibility, work hard in school, make good grades, work in your off time so you can make payments on your debt while still in school or minimize future borrowing and to graduate as soon as possible. Skip the partying, slacking and anything that detracts from your academics. This shows that you are a worthwhile risk.
Most private student loans offer cosigner release. The terms will vary by lender and is an important criteria when comparing lenders. Some lenders will offer release within as little as 12 months of regular on-time payments while others may require two to three years of payments. Other than cosigner release or refinancing your debt, the cosigner belongs to the debt as long as it is in repayment.
What are some risks for you with a cosigned loan?
One recent hiccup we’ve written about in our blog is what happens when the cosigner dies. Many private student loans contain language in the terms and conditions that your loan can be called in (i.e. demanded to be paid in full or auto-defaulted) if your cosigner dies even if you’re current on your payments. This may be avoidable if you proactively contact your lender to work something out if your cosigner passes away.
What happens to your cosigner if you can’t pay your loan?
As mentioned above, your cosigner is equally as responsible for the debt as you are. If you fail to make the payments, it will fall to them. If they don’t pay or can’t pay, collections activity will be pursued against both you and your cosigner. Both of your credit reports will take a hit and you can both be pursued to the extent that the law allows for collection of a private debt.
One of the best ways to ensure that you are always in control of your student debt is to keep track of your debt. Sign up now for Tuition.io’s free student loan tool to see all of your loans – both federal and private – in one easy dashboard so you’ll always know where you stand, how much your monthly payments will be and get tips to optimize your debt.
Image Courtesy of Flickr Creative Commons User Phil Roeder