What You Should Know Before Cosigning a Student Loan

The cost of a college degree rises every year. Education costs for undergraduates at public institutions rose by 28% over a 10-year period, according to recent data from the National Center for Education Statistics.

Federal student aid programs help students pay these expenses to a certain extent. But many students are unable to pay for school without additional funding through private student loans.

That’s where a family member or other trusted adult with good credit and a stable income can help. Incoming first-year students don't usually have a good credit score or established credit history. They also likely don’t have the income to support a private student loan qualification. Therefore, a parent or grandparent might have to cosign a student loan.

Similarly, a creditworthy cosigner may help graduate students who are obtaining advanced degrees qualify for additional funding, if students reached federal student loan limits.

Here are two important distinctions to keep in mind when cosigning on a student loan:

• Primary borrower. An individual who receives loan funds and whose name appears as the first point of contact for the loan. Written communication from the lender is usually provided to the primary borrower along with online account access.
• Cosigner. A person who doesn’t receive any loan amount, but has equal responsibility for repayment of a loan. Lenders notify cosigners when loan repayment issues arise to collect the debt. For example, a student loan cosigner might be alerted if the primary borrower can’t be contacted or fails to make student loan payments.

What to consider before cosigning a student loan

While changes to the loan can only be initiated by the primary borrower, as a cosigner you're equally obligated to repay the loan. Since your money and financial reputation are on the line, here are a few things to know before agreeing to be a cosigner.

1. Interest rates can be high when you cosign a student loan

Private student loan approvals are based on minimum income and creditworthiness requirements. Lower interest rates are generally available to primary borrowers and cosigners with excellent credit. However, even with perfect credit, interest rates with private lenders are sometimes more than federal student loan rates.

Before making a final decision, compare rates and terms among private student loan lenders to find the most affordable loan overall.

2. Cosigning a student loan can affect your buying power

Cosigning a student loan increases your debt-to-income ratio. So, keep this in mind if you plan on buying a new home or taking out a line of credit for any other reason during the period of the student loan.

Make a list of new financing you're likely to need over the time period of the cosigned loan. Then, decide if you’re willing to forgo additional financing during this time.

3. Your credit might take a hit

As a cosigner, delinquent and late payments on private student loans are reflected on your credit report, since repayment activity is reported to the credit bureaus. Lender policies vary, so you might get notified as soon as the primary borrower misses the first payment, or after the account is already in default.

In addition to negatively affecting your credit, late payments equal late fees. This means that you’re paying more on the loan than you initially planned, and just one late payment can delay your eligibility for cosigner release on the student loan.

Confirm with the lender that your contact information can be added to the account. Be sure to request online account access for bill payment and account status notifications.

4. Cosigner release is critical

A cosigner release frees cosigners from obligations associated with the loan after a specified period, but not all lenders offer this option.

A common condition of a cosigner release is demonstrating a minimum number of on-time payments. Additionally, some lenders require students to complete or graduate from their academic program, before approving a cosigner release.

A cosigner release approval for denial may take up to 30 days (or longer) so it’s important to remain in good standing during this time or your chances of being released from the loan may be compromised.

Some private loan lenders go as far as to view the student’s participation in a student loan hardship, forbearance or modified repayment program as a reason to decline a cosigner release.

It’s important to be with your student every step of the way when cosigning on a private student loan, and make sure you’re both educated on whether your lender offers cosigner release options, including terms and conditions.

5. Cosigner release is unlikely for international student borrowers

In addition to the other limitations of being released as a cosigner, the primary borrower must be a United States citizen or permanent resident at the time of the cosigner release request.

International students are expected to return to their country of origin after completing their education. If this occurs, the lender believes they will not receive the funds owed to them without a cosigner. Read the conditions for a cosigner release and contact the lender with any questions before signing the promissory note.

6. Your student might not really need a cosigner

If your student meets income requirements and has a good credit history, she may not need a cosigner. But, she may obtain better loan rates and terms with a cosigner.

Ask your student if they can qualify for the loan without a cosigner, even if it means a higher interest rate. If your student can qualify on their own, then they should consider shopping around for a better interest rate if you prefer not to cosign the student loan.

While we want to help our relatives with their education, cosigning a private student loan may not be the best way to assist them. For example, a less expensive educational program may be the best option. Talk with your student to ensure they’ve explored all other possible options.

Important tips when cosigning a student loan

Here are some important tips to remember before going into debt for someone else’s education.

• Max out other types of financial aid first. Students should maximize opportunities for federal loans via the Free Application for Federal Student Aid (FAFSA). They should also apply for scholarships and grants before asking you to cosign on a private loan.
• Ask the primary borrower to take financial literacy classes. Suggest your student enroll in financial literacy training online or at their college or university.
• Always read the paperwork. Read the student loan promissory note and disclosure statement before cosigning. Nothing can replace being fully educated about the financial commitment you’re going to undertake.
• Determine who’ll make monthly payments. Talk to your student about their responsibility for repaying the loan. For example, don’t assume the student will make payments on the loan if they don’t have a job. Assumptions can be costly.
• Look into refinancing. If your student failed to make on-time payments and is ineligible for a cosigner release, see if student loan refinancing is an option without a cosigner. The new loan, which will be under a new lender, will be entirely the responsibility of the primary borrower. The primary borrower might be able to refinance with a new cosigner, too.
• Get online access to the private student loan account. Set up online access to make urgent payments on the student loan, if needed. It’s helpful to have copies of all loan paperwork from the student, including online account login information.
• Keep your contact information updated with the lender. If they're unable to contact the primary borrower, you’ll want to make sure they can reach you. Both missed payments and a delinquent status can hurt your credit. So, you don’t want to wait until the account is in default before taking action.

Consider all financial and personal factors before cosigning a loan

It can be difficult to make a decision to cosign a student loan with limited or inaccurate information. You might also feel conflicted between being supportive of your student and limiting your financial risk.

Cosigners are putting themselves at risk financially and emotionally by signing on the dotted line. If the primary borrower fails to make payments, this not only damages the cosigner's credit history, but it can ruin trust in the relationship.

Therefore, one of the most important things to consider when you cosign a student loan is how the arrangement might impact your relationship with the primary borrower. Additionally, you'll need to weigh all potential financial consequences before moving forward.

Have you ever cosigned on another type of loan? Would you consider it for your child's student loans?