It's very common for a student who needs a private student loan to have one or more cosigners. Parents, guardians, relatives or other trusted parties can help a student qualify for a loan or receive a lower interest rate. Before cosigning, it's important to understand exactly what you can expect. Keep reading for the answers to nine frequently asked questions.
What is a cosigner?
A cosigner is someone who is willing to share responsibility for a loan so that a student can qualify for the loan or receive a better rate. Most students do not have the credit history or credit score required by lenders to obtain a private student loan on their own.
How does cosigning a loan work?
Start with a careful comparison of available rates offered by multiple lenders, as well as the understanding of what credit score is needed to achieve each rate from a particular lender. Once you, the student and any other potential cosigner knows the best loan option for your shared situation, the loan application process begins. The process for a private student loan may look like this:
- The student and all cosigners pre-qualify, if possible, to know the rate each lender offers based on their credit scores.
- The student completes the loan application and provides your and any other cosigner's contact information.
- You and any other cosigner complete your portion of the application and submit any required documentation. The lender will verify your information and calculate the interest rate based on their underwriting criteria.
- The student will receive a loan offer from the lender that includes the rate and repayment terms. Cosigners may be informed of the rate at this time.
- The student must agree to the loan terms, accept certain disclosures and complete the federally required Private Education Loan Applicant Self-Certification form before the money is sent to the student's school. Cosigners will receive a copy of required disclosures after the student accepts the loan offer.
- Depending on the repayment terms, loan payments may begin right away or be deferred until after the student leaves school.
What is the responsibility of a cosigner?
Any cosigner shares responsibility to repay the debt equally with the primary borrower. Delinquencies and default will affect your credit. Your responsibility to repay the debt does not change if:
- The borrower has agreed to manage repayment on their own.
- The primary borrower does not graduate from college or obtain a job that pays enough to afford student loan payments.
- Your financial circumstances change due to retirement, job loss, bankruptcy or other events.
See more information about what cosigners need to know.
When does a cosigner's responsibility end?
Many cosigners remain responsible until the loan is repaid in full. However, some lenders offer cosigner release options. In these cases, if specific criteria can be met by the borrower, the borrower may request to release cosigners from their obligations.
In addition, some lenders forgive the balance of a loan in the event of a borrower's death or release a cosigner that suffers a total and permanent disability.
How does cosigning a student loan affect my credit?
When you apply as a cosigner, the lender will ask the national consumer reporting agencies for details of your credit history. This is known as a hard credit inquiry and generally has a short-term negative impact on your credit score. Your credit score may also dip if the new loan brings down the average age of your accounts.
If late loan payments are reported to the national consumer reporting agencies or if the loan is sent to collections, your credit score will be affected. A delinquency could remain on your credit report for up to seven years. Monitor payment due dates and seek assistance if the minimum monthly payments can't be made.
If payments are made on time and the loan is paid off as agreed, cosigning can also improve your credit score.
What are the risks of cosigning a student loan?
Cosigning a student loan carries some risks. If the primary borrower or another cosigner on the loan is not making the minimum monthly payment, that responsibility will fall to you.
Even if the primary borrower is making the payments, other lenders may include this debt when calculating your debt-to-income ratio for future loans.
If your financial situation substantially changes before the loan is paid in full, making payments may be a hardship. Consider your anticipated income for the latter years of the loan term as well as possible scenarios such as medical issues.
While cosigning a student loan is primarily a financial decision, parents should also consider how repayment issues could affect their personal relationship with their student.
How can I help my student minimize loan debt?
Helping your student minimize the amount of student loan debt that has to be repaid is beneficial for you and for them.
Plan for success by encouraging your student to choose an educational path, field of study and career that will provide the income needed for the lifestyle the student wants after graduating. Tools like Student Loan Game Plan and the Return on College Investment tool will help by providing a comparison of educational paths to achieve a particular career and a realistic starting salary and budget for graduates of specific majors.
Understand the total cost of college and determine the maximum amount that can be paid without loans. The College Funding Forecaster helps families estimate the total cost of a four-year degree based on their unique circumstances.
Help your student to perform well academically, prepare for the job search and live within their means while they are in college. Set mutually acceptable expectations and hold your student accountable.
How can I help my student financially prepare to pay back student loans?
In addition to the steps above, you can encourage your student to:
As your student progresses through college, you can also work with them to determine potential jobs that will allow them to handle the costs of living independently and also repay their loans.
How do I choose the best lender for my student's loans?
You can use many strategies for choosing a lender. You may wish to look at the combination of interest rates, fees and benefits; choose a lender you trust not to push you toward additional financial products; or look at how the lender uses the proceeds from its business.
As a nonprofit organization, ISL Education Lending offers lower-rate loans to help students and families with gaps in funding for college expenses. The educational and planning resources offered for free on its website; the choice of loans and repayment options; and more than 40 years' experience in the student lending industry make it a good choice for many families.
You can see rates based on specific credit scores (PDF), pre-qualify to see your actual rate without an impact to your credit and be assured that ISL Education Lending is ready to answer your questions without attempting to sell you other types of financial products.
ISL Education Lending knows how important it is for students and their cosigners to receive the best possible rate.
- Only the cosigner's credit score is considered to determine the rate for a Partnership Advance Education Loan.
- The higher credit score between the applicant and the cosigner is used to determine the interest rate for the College Family Loan.
- If a second cosigner applies, the higher score between the two cosigners determines the loan's interest rate.
While cosigning for a student loan can help a student with college costs, applicants and cosigners should understand the process, the responsibility and the risks.