College is tough — not only do you have to shoulder a rigorous academic burden, you also have to figure out a way to pay for four years of school. With college costs rising, more students are turning to student loans. In fact, seven out of 10 recent college graduates find themselves loaded down with student debt, with an average loan amount of $35,000.
Often, to qualify for a loan with a lower interest rate, or to qualify to refinance their student loans, borrowers will add a cosigner — someone with a longer or stronger credit history — to their loan.
A cosigner is simply someone who attaches their name to the loan along with the primary borrower, in order to provide a guarantee that the loan will be repaid. By signing on to the loan, the cosigner agrees to take on the full responsibility of the loan if the primary borrower fails to repay it. While parents, grandparents or other relatives are typical cosigner candidates, a cosigner can also be a spouse, a friend, or anyone who is at least 18 years old and a U.S. citizen or permanent resident.
Benefits of a cosigner
Adding a cosigner has many benefits, including lower interest rates and a faster loan approval process. A recent report from MeasureOne shows that close to 94 percent of private undergraduate student loans now involve cosigners, up from about 75 percent in 2008-2009.
The report, a semi-annual update on the private student loan market, is based on data contributed by the six largest originators of private education loans — Citizens Bank, Discover Bank, Navient, PNC Bank, Sallie Mae, and Wells Fargo.
Cumulatively, they make up the majority of both outstanding private student loans and new originations — approximately 66.7 percent of the entire private student loan market.
Source: measureone.com/reports.
To understand why adding a cosigner can be so effective, you first need to learn how lenders evaluate you as a borrower. Generally speaking, lenders will take into account your debt load, income, credit score, and credit history (such as how many lines of credit you have, whether you’re making all your payments on time, and how much credit you have available).
But different lenders use different credit bureaus, and consider different factors when evaluating borrowers and cosigners — that’s why it’s very important that you compare lenders to get exposure to more options and find the best deal for you. Credible.com allows you to compare personalized rates from multiple, vetted lenders, helping you shop for the best offer.
If you’re a college freshman, chances are you don’t currently make enough money or have the credit history private lenders want to see. In a lender’s eyes then, a cosigner adds legitimacy and lessens the risk of your loan. Because the lender can turn to the cosigner if you default, they are more willing to take you on as a risk. And depending on your cosigner’s credit and income, banks might even be willing to lower your interest rate, which could save you thousands of dollars over the life of the loan.
When taking out a student loan, adding a cosigner could mean:
- A greater chance of approval: a lender is more likely to approve your loan if you have a cosigner with a solid credit history, especially if you have poor or no credit
- Less risk taken by the lender: adding another person to the loan increases the bank’s chances of recovering their investment in case you are unable to repay the loan
- A lower interest rate: a bank will be more likely to give you a lower interest rate, since they can rely on your cosigner to repay the loan should you not be able to
All other things being equal, the better your cosigner’s credit score, the lower interest rate you may qualify for. The Credible marketplace makes it easy for you to compare rates with different cosigners. You can compare how each one improves your rates, or you can decide to continue alone if you can qualify for a loan without a cosigner.
Considerations for cosigners
As you can see, adding a cosigner can be beneficial for both you and the lender. However, it’s important that you always understand the terms of your loan — some private student loans may include provisions that allow you to drop the cosigner after you meet certain requirements, such as making 12 to 36 months of consecutive on-time payments.
Adding a cosigner to a loan that you repay on time can also help you establish your own credit history at an early age, something that will help you later, when you go on to purchase a car or a house.
While there are many benefits to adding on a cosigner, this is not an action to be taken lightly. Adding on a cosigner doesn’t absolve you of your responsibility to make your loan payments on time. In fact, adding a cosigner means that it’s more important than ever that you keep track of when your payments are due.
Remember, your cosigner does not benefit from this arrangement; if you fail to make a payment, not only are they on the hook for the money you owe, that late payment could damage their credit history as well as yours. Because of these potential risks, you may find it difficult to get someone to agree to be a cosigner for you.
In order to increase your chances of getting a cosigner, you should encourage any potential cosigner to consider the following:
- Draw up and sign a written agreement with the borrower wherein he/she agrees to make all payments through the life of the loan and in a timely manner. A signed document can help protect the cosigner in the case of any legal issues pertaining to the loan.
- Check whether the lender offers a release to cosigners, and what benefits and protections your cosigner is entitled to.
- Find out if the borrower has a life insurance policy. This will prevent you and your family from shouldering the burden of repayment in case of an accident.
- Don’t just sign and forget: keep in touch with the borrower to ensure he/she is making timely monthly loan payments.
Ariha Setalvad <ariha@credible.com> is a Credible staff writer. Follow us on Twitter at @Credible.