The decision to be a co-signer on a student loan should come with a lot of consideration. How much is the person applying for? What is the repayment plan? Can you afford to make those repayments if the borrower cannot? Do you trust that person? These are among the questions to consider.
If you are a student who is looking to apply for funding to get you through college, are you aware of the pros/cons of getting someone to sign on the dotted line with you? Do you know what difference it will make in terms of interest rates and the amount you’re allowed to borrow? Does it have to be your parent or can you get another family relative to sign? These are all things you should know. On that note, let’s delve into this topic a little more and explore how cosigning works and the pros and cons that come with it.
How Does It Work?
A co-signer is someone who puts his or her name on a student’s loan application. In doing so, they agree to be legally accountable for repaying the outstanding amount in the event the borrower fails to make the agreed repayments. Despite being responsible for making repayments should the primary borrower fail to pay back the debt, a co-signer does not have any right to access the money. It’s not like a joint loan where two people sign and have equal access to money.
Who Can Cosign on a Student Loan?
Typically, only one person can be a co-signer on a private student loan. This can be a family relative, a spouse, parent, friend or guardian. Students can generally benefit from flexible loans with a co-signer on board. Most lenders require co-signers to be of legal age and of U.S. nationality. Having a good credit score and a high monthly income is always beneficial, as some lenders require certain thresholds to be met. If you’re a student and you want your parents to sign, only one parent can be listed and it will be his/her credit score and income to debt ratio that will be taken into account.
If the borrower misses a payment or relapses on payments for a while, the co-signer’s credit score will be affected. Having a poor credit score comes with more consequences than you might think. From fewer loan options to higher interest rates, borrowers will now see that person as high risk and they may not be as willing to lend them money. This point is especially important if the person plans to borrow money in the future.
If you are thinking about becoming a co-signer, you need to consider the relationship you have with the borrower. Do you trust them to pay back the debt? Is he/she responsible enough to do what it takes to make the repayments? Is he/she a close relative or a friend that you’re willing to help out? You need to really think about what would happen in the event that the borrower defaults on repayments. Think about the financial cost and the implications that would have on your savings. Can you really afford to pay back the money and the fees and interest?
The lender will typically see the borrower in a much more positive light with a co-signer on board, simply because those with established credit are essentially vouching for the student that repayments will be made, eventually by the student, but if they fail to, it will fall on the co-signer. Most students don’t have a credit history, collateral, and they don’t meet the required income thresholds and debt-to-income ratio. In that instance, borrowers look to the co-signer and take their details into account. If all requirements are met, the primary borrower becomes less risky and a much better candidate.
With a co-signer on board, a student may qualify for lower interest rates. It may even allow the primary borrower to apply for a larger loan amount. If the borrower meets payments on time, he/she will be able to build a strong credit rating. This can lead to all kinds of benefits from lower interest rates on cars, credit cards and property.
The Bottom Line
As a co-signer, you must have a discussion with the student about the repayment plan and how they expect to pay the debt back. If the repayments are met on time, being listed as a co-signer may not have an effect on your credit score or finances at all. As a student, having a co-signer comes with so many benefits as outlined above. There are many things to consider when asking a person to take on that responsibility.
Have a discussion and explain why you need the loan and what you plan to study. Explain why you need to have him/her listed as a backup and what benefits that brings for you. Ensure you make their legal obligations clear and put their mind at rest by outlining your plan to make repayments. Finally, in a perfect world, we’d all meet our financial obligations and there would be no such thing as loan defaults. However, unexpected things happen and it can be easy to fall into a financial rut. Be honest with the person you’re asking to be a co-signer and have a conversation about what will happen if you can’t make repayments. Promise to let them know in time so you both can come up with an alternative plan together.