Everything You Should Know About Cosigning a Student Loan
Categories: Blog, For Students
Your child, niece, nephew, or grandchild was recently accepted to the school of their dreams, and you couldn’t be happier. As you explore how to pay for college, you may consider becoming a cosigner for a student loan. Are there cosigner requirements? How does cosigning a student loan affect my credit? What exactly is a cosigner anyway?
Below is everything you should know about cosigning a student loan.
What is a Cosigner?
So what does cosigning a loan mean? A cosigner agrees to take full responsibility for making payments on a student loan, if the student borrower is unable to make their payments in the future.
Who is Eligible to Cosign a Loan?
A cosigner doesn’t need to be a family member like a parent, aunt, uncle, or grandparent – although, these are the most common people who choose to cosign a student loan. You may also be a:
- Legal guardian
- Teacher or professor
- Mentor or coach
Requirements to Cosign a Student Loan
If you’re considering cosigning a student loan, know that there are cosigner requirements to apply.
Among other things, you must have a:
- Good credit score
- Great financial health
- Stable income
- Willingness to make loan payments if the borrower is unable
For example, to apply for Ascent’s Cosigned Credit-Based Loan, a cosigner must meet the following criteria:
- Be at least 18 years old (or the age of majority), and a U.S. citizen or permanent resident.
- Have more than two (2) years of credit history.
- Meet a minimum credit score (which is subject to change).
- Earn a minimum gross annual income of $24,000 for the current and previous year and submit proof of income.
What Exactly Does it Mean to Cosign a Student Loan?
Being a cosigner for a student loan is a serious responsibility that shouldn’t be taken lightly. In addition to taking full responsibility for the loan, a cosigner’s credit can also be impacted if the borrower misses or makes late payments.
Lenders Will Consider the Cosigner’s Credit History as Well
When applying for a student loan, lenders will often check both the borrower’s and cosigner’s credit scores with a hard credit pull. That’s why one of the requirements to be a cosigner is having good credit. A poor credit score may impact student loan options and/or interest rates.
The Cosigner Becomes Jointly Responsible for the Student Loan
We keep mentioning this for a good reason – it’s important to consider the risks involved when cosigning a student loan.
Depending on your student borrower, this may be the first time they borrow money or need to be financially responsible. They must understand the importance of knowing who their loan servicer is, when they’ll be required to start making payments, and how long they will need to make payments until their debt is paid off. Introducing them to these financial wellness habits early will help them prepare to make that first payment, and maintain good financial health after graduation.
As a cosigner, and as someone who wants to see their student succeed, you should create a space where your student borrower feels comfortable asking tough questions and where you feel comfortable answering honestly. Have a conversation upfront before applying for a student loan so you both are on the same terms.
What Happens if the Borrower Defaults on the Student Loan?
For federal loans, a borrower defaults if they fail to make payments for 270 days. The student may also lose the ability to receive future financial aid and experience legal ramifications.
For private loans, defaulting can result in the lender taking the loan to collections, and possibly taking the borrower to court – in addition to negative credit reporting.
In either situation, as the cosigner, you will be responsible for making payments on behalf of the student.
The Pros and Cons of Cosigning a Student Loan
There are some pros to being a cosigner, however. Below are the pros and cons of cosigning.
Pros of Cosigning a Loan
There are many pros to being a cosigner, like:
- The borrower becomes a better loan candidate – lenders assess risk before making loan offers. Lenders want to know if a borrower has a steady income and good credit history. Most student loan borrowers don’t meet these requirements independently, so having a cosigner reduces risk and makes borrowers more appealing to lenders.
- Borrowers will build credit – if borrowers make their loan payments on time, they’ll show their creditors that they are reliable. This will build up their credit score and make it easier for them to get other loans down the road, like a car or home loan.
- The borrower may get better terms – borrowers with poor credit scores tend to receive high-interest rates. A cosigner with a good credit score may help secure borrowers with better loans and lower interest rates.
- It can teach borrowers how to be smart with their money – borrowers can learn what it means to be financially responsible by budgeting and making loan payments.
- They get a chance to attend college – a borrower with poor credit or no credit history might not be eligible on their own, which means they might not get a loan. A cosigner can give them a chance to get that loan and attend college.
Cons of Cosigning a Loan
There are also plenty of cons to consider, like:
- You are responsible for paying off the loan if the borrower can’t.
- If you have too much debt already, it might hinder your ability to get other loans.
- Your credit score may be impacted.
- A missed payment stays on your record for seven years.
- Your relationship may become strained – sometimes, students ask for a cosigner without realizing the emotional impact it may cause. Suppose they can’t make payments; this could cause significant strain on your relationship.
- It’s hard to get released as a cosigner – lenders often offer cosigner release programs. release a cosigner if the borrower proves they can repay the loan on their own.
What to Consider Before Cosigning a Student Loan
Before jumping in and signing, there are a few things to consider:
- Has the borrower been responsible in the past? Think back to any time the borrower handled money. Have they managed it well?
- Will you be comfortable making payments if the borrower can’t? Can you afford to step in financially when the borrower needs you to?
- What about your loans? Are you planning on buying a new car or home soon?
- Are you comfortable reminding the borrower about payment if they tend to pay late?
- Is your credit score good enough to handle cosigning a student loan?
Is it Worth Cosigning a Student Loan?
Cosigning a student loan can be worth it if the borrower is reliable. It gives the student borrower an excellent chance to build credit and healthy financial habits early.
Looking for someone to cosign your loan? Check out our guide on how to ask someone to cosign your loan.