Editor’s note: This article was published July 28, 2016.
For students taking out private loans to cover college funding gaps, having a cosigner not only improves the odds of being approved for a loan, but can help borrowers obtain, on average, a better interest rate, an analysis of Credible user data shows.
The analysis of rate requests submitted to the Credible student loan marketplace revealed that private student loan lenders offer rates that can be competitive with costly federal PLUS loans — particularly when borrowers apply with a cosigner.
- Fifty-one percent of undergraduates shopping for loans with a cosigner on the Credible platform received personalized rate quotes, compared to 20 percent of undergrads who did not have a cosigner.
- Fifty-six percent of grad students loan shopping with a cosigner received rate quotes, compared to 45 percent who requested quotes without a cosigner.
- Undergraduates shopping with cosigners qualified for loans with interest rates averaging 5.37 percent. Without a cosigner, rates averaged 7.46 percent.
- Graduate students shopping with a cosigner got quotes for loans with interest rates averaging 4.59 percent, compared to an average of 6.21 percent without a cosigner.
A recent report by MeasureOne shows that nearly 94 percent of private undergraduate student loans are made with cosigners, up from about 75 percent in 2008-2009.
But cosigning a loan is a serious commitment. If a borrower can’t make their monthly payments, cosigners are not only on the hook for the money that’s owed, but late payments could damage their credit history.
Yet more college students and parents are turning to private student loans. According to MeasureOne, during the 2014-2015 academic year, the six biggest private lenders made $7.12 billion in student loans, an 8 percent increase from the year before and a 36 percent increase from 2010-11.
What’s driving the growth in private student lending, despite the fact that these loans typically require a cosigner? The simple answer is that there are annual and lifetime borrowing limits on the most affordable federal student loans.
Once they’ve hit those borrowing limits, students must often turn either to more expensive federal PLUS loans, or private lenders, to bridge any funding gaps.
In this Credible Insights report, the latest in a series, we’ll take a closer look at who is willing to take the leap and cosign a private student loan, and why. We’ll also talk about the obligations that cosigners take on, and how they can be released from them before a loan is paid off.
Who can be a cosigner?
While a cosigner is often someone who has close ties to the borrower, such as a parent or spouse, lenders don’t spell out what kind of relationships are permissible. Other relatives — including grandparents, siblings, aunts and uncle — can come to the aid of student loan borrowers. So can friends and employers.
In fact, pretty much anybody who cares enough about the borrower’s future to help them out can be a cosigner, as long as they are at least 18 years old, a U.S. citizen or permanent resident, and meet the lender’s credit and income requirements.
An analysis of nearly 8,000 borrowers who requested quotes for private student loans through Credible’s multi-lender marketplace shows that parents are, in fact, most often the ones who end up taking on the duty of cosigner.
But while parents signed three out four cosigned private student loans facilitated by Credible, other relatives, siblings and friends accounted for a significant percentage of cosigners.
Cosigner relationship to borrower
Benefits of adding a cosigner
Although some graduate students may have the credit and income history needed to qualify for a private student loan without a cosigner, most undergraduates will not.
The presence of a cosigner with a strong credit and income history is a safety net for the lender — with a cosigner, lenders have an extra layer of protection against borrower default.
Better chance of qualifying
Credible’s relationships with lenders and credit bureaus allows students or their cosigners to submit one form and compare personalized rate quotes from multiple lenders. As the chart below illustrates, 80 percent of undergraduates who requested rate quotes for private student loans through the Credible platform without a cosigner did not qualify.
But a little more than half of those submitting requests with a cosigner (51 percent) got offers from lenders. Many undergraduates who did not qualify with a cosigner could have received rate quotes if they applied with a cosigner with a stronger income and credit history. Exceptions would include students who have previously defaulted on a student loan, or students seeking loans to attend schools not on any lender’s list of eligible schools.
Impact of cosigner on qualifying for a loan
Use the ‘Show’ filter to see the impact cosigners can have on graduate vs. undergraduate students.
Graduate students were more likely than undergraduates to qualify for a loan without a cosigner — 45 percent of those making requests got a personalized rate quote from a Credible partner lender. But more than than half (56 percent) of graduate students who requested rate quotes with a cosigner prequalified to apply for a loan.
Lower interest rate
A cosigner’s credit worthiness can not only determine whether a student can get a private student loan, but, in many cases, can also help the borrower obtain a better rate.
Lenders on the Credible platform are currently offering fixed-rate private student loans at rates as low as 4 percent, and variable-rate loans starting at 2.20 percent. Those rates are for borrowers or cosigners with excellent credit. The annual percentage rate on fixed-rate private student loans can exceed 10 percent.
Undergraduate students using the Credible platform to request quotes for private loans with a cosigner qualified for loans with interest rates averaging 5.37 percent. Without a cosigner, undergraduates qualified for loans with interest rates averaging 7.46 percent (those averages include quotes for both variable-rate and fixed-rate loans).
Graduate students saw similar benefits when bringing a cosigner into the process. With a cosigner, grad students qualified for loans with interest rates averaging 4.59 percent, compared to an average of 6.21 percent without a cosigner.
Interest rates: private vs federal loans
College financial aid advisers recommend that students who must borrow for college start with federal direct subsidized and unsubsidized loans. Rates on these government loans — the most affordable available to undergraduates — will be 3.76 percent for loans issued during the 2016-2017 school year.
But dependent undergraduate students are limited to taking out no more than $5,500 to $7,500 a year in these affordable loans, with a lifetime limit of $31,000 while pursuing their bachelor’s degree. After that, undergraduates can either turn to federal PLUS loans for parents, or private student loans.
Interest rates on PLUS loans are currently 6.31 percent, but PLUS loans also carry a costly 4.3 percent up-front disbursement fee. For loans paid back over the standard 10-year term, this disbursement fee has the same effect as adding an additional percentage point to the loan’s annual percentage rate (APR).
Graduate students have some leeway to take out unsubsidized direct loans for grad students, which will carry interest rates of 5.31 percent for the 2016-17 school year, before turning to PLUS loans. That’s one reason that, according to MeasureOne’s data, about 90 percent of newly-originated private student loans (by dollar volume) are made to undergraduates.
Although every student’s situation is unique, Credible’s user data demonstrate that private lenders offer rates that can be competitive with federal PLUS loans, particularly when borrowers apply with a cosigner. Other factors to consider when comparing federal and private student loans include borrower benefits not offered by private lenders, such as access to income-driven repayment programs and the potential to qualify for loan forgiveness.
Cosigning a private student loan for a child, relative, friend or employee can help put them on the path to realizing their educational and career goals. But cosigning a loan means taking on the borrower’s obligation to repay the loan if they cannot.
That commitment does not have to last for the life of the loan. Many lenders will release the cosigner after the borrower has established a track record of making payments — typically one to four years. To obtain lender approval for a “cosigner release,” borrowers must often meet certain underwriting criteria.
Sallie Mae, for example, will accept applications for cosigner release after the borrower has made 12 consecutive on-time payment. Borrowers must be able to demonstrate they are ready “assume full responsibility for repayment of the loan” or loans on their own, and pass a credit review that demonstrates a satisfactory credit history.
College Ave will accept applications for cosigner release after the borrower is halfway through the repayment term, has made 24 consecutive on-time payments, and can provide proof that they’ve been working for the last 24 months. Borrowers must have annual income that’s at least twice the sum of all loans outstanding with College Ave.
In the past, not every lender was as clear about the specific criteria needed to obtain a cosigner release. The Consumer Financial Protection Bureau noted in a 2015 report that found nine out of 10 borrowers who applied for cosigner release were rejected (Editor’s note: In an Aug. 12, 2016 “Your Money” column, The New York Times’ Ron Lieber reported that Citizens Bank says it grants 64 percent of requests for cosigner releases, Sallie Mae approves “more than half,” and PNC’s approval rate is 45 percent).
Graduate students and parents seeking to take out federal PLUS loans may also need a cosigner if they have any adverse credit history within the last five years, such as bills that are more than 90 days overdue, or a bankruptcy or foreclosure.
Those who endorse a PLUS loan (the government’s term for a cosigner), cannot be released until the loan has been repaid in full. Servicers collecting payments on federal PLUS loans can use the same tactics against endorsers that they employ against the delinquent borrowers, including wage garnishment.
Parent loans: private and federal
A growing number of private lenders offer student loans to parents that are marketed as an alternative to federal PLUS loans. Lenders offering private parent loans include Citizens Bank, CollegeAve, RISLA, Sallie Mae, SoFi and Wells Fargo.
Considerations for parents weighing whether to cosign a loan for their child or taking out a parent loan in their own name include who is expected to pay the loan back, and who will claim any tax benefits.
If a parent cosigns a loan for their child, it will be clear that the child is expected to repay the loan — even if the obligation eventually falls on the parent’s shoulders. If a parent takes a loan out in their own name, they will be able to claim the student loan interest deduction, a perk that was worth up to $625 on 2015 tax returns.
Unlike PLUS loans for graduate students, federal PLUS loans taken out by parents aren’t eligible for most income-driven repayment plans.
Parents who take out PLUS loans can consolidate them in a Direct Consolidation Loan and then repay the new consolidation loan under an Income Contingent Repayment (ICR) plan. ICR plans are more restrictive than newer income-driven plans like PAYE and REPAYE, requiring monthly payments equal to either 20 percent of discretionary income, or what the borrower would pay on a 12-year fixed repayment plan, whichever is less. Cosigners (endorsers) of PLUS loans cannot apply to combine them into a federal Direct Consolidation Loan.
This Insights report analyzed a representative sample of 7,796 requests for rate quotes by Credible users for private student loans over a one-year period, including 4,401 requests in which users submitted their request with a prospective cosigner.
Statistics on the percentage of users who met lender criteria and therefore received one or more rate requests are based on the entire dataset.
Statistics on the type of cosigner — parent, guardian, relative, or friend — are based on a subset of users who accepted a loan offer from a Credible partner lender.
Average interest rates for personalized rate quotes received by Credible users were calculated using the lowest rate received by each borrower. When individual borrowers received multiple rate quotes, the lowest rate was used to calculate the average rate for the group as a whole.
MeasureOne publishes private student loan data provided by six major lenders — Citizens Bank, Discover Bank, Navient, PNC Bank, Sallie Mae, and Wells Fargo — that originate about two-thirds of private student loans.
Editor’s note: This post was updated on Aug. 11, 2016 to reflect College Ave’s current policies on cosigner release. College Ave will accept applications for cosigner release after the borrower is halfway through the repayment term, has made 24 consecutive on-time payments, and can provide proof that they’ve been working for the last 24 months.
Credible is a multi-lender marketplace that allows borrowers to get personalized rates and compare loans from vetted lenders, without affecting their credit score. Credible’s student loan partner lenders are Citizens Bank, College Ave, CommonBond, iHelp, and RISLA.