When borrowing student loans, lenders usually check for your credit score. If you don’t have credit as per their requirement, you need someone who would strengthen your loan application and act as a reassurance. This someone is called as a cosigner.
The lenders would expect a cosigner to have a little more credibility and whom they can trust and depend on, to promise that in the instance that you stop making payments they shall be responsible and take up the duty to pay back whatever loan amount that is left to pay.
It is a safe bet for the bank of sorts. When you get a cosigner to sign off on your loan the bank or lender becomes more confident and might end up giving you advantages or perks for the same.
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Who is a cosigner?
A cosigner is a person who would share the responsibility of paying back the loans with you. So, in case you have applied for the loan and are not able to make payments at any time, your cosigner would be legally responsible for making payments on your behalf.
Your cosigner could be your parents, a trusted family member or a friend with a good credit score and stable employment history.
Cosigners play a major role in the lending and borrowing world as without them most of the students, especially those opting for private student loans, won’t be able to qualify for them on their own. This is because of the inadequate income or credit history of the student.
Factors to consider when choosing a cosigner
1. Credit history - You cosigner should have an acceptable credit history, i.e., they should be able to make regular and timely payments on loans and also have a good credit score as this is a reflection of past transactions of such similar situations. Along with this, the cosigner should also have a low debt-to-income ratio and a reliable source of income.
The minimum credit score a cosigner should be having is 720 or higher, but if the score lies between 680 - 720, you might still qualify for the loan but might be charged with a higher interest rate.
2. Stability - Your cosigner’s job history should be stable and secured along with the amount of time that they’ve lived on their income. Their income should be sufficient to repay the loans you applied for, in the event the lenders approve of it.
You should choose someone who is working in the same company for at least a year, if not longer and also have an income source which can be easily verified.
The longer the cosigner stays in a place with a well-maintained steady income, the better are the chances for you to get your loan approved.
3. Age and good health - Having a middle-aged or younger cosigner with good health would be a better option for you rather than the one in poor health and above the age of 60. This is because some lenders have a clause in their student loan agreement where you’ll be liable to pay the whole amount of debt in case your cosigner passed away. Even worse, the lender might even put the status of your loans as default, in case you don’t know of this agreement and didn’t make payments.
This can be done without any notice, hence, it will ruin your credit score.
4. Relationship with the borrower - A cosigner can be anyone with a good credit score willing to help you out with your student loans. It can be someone you are related to, like your parents, siblings, cousins, uncles or any other relatives or someone you are not related to like your friends, colleagues, or a family friend.
Why is a cosigner needed?
Following are the reasons which show the requirements of a cosigner -
You are not able to satisfy the minimum income requirements of the loan
You do not have established credit/bad credit score
You have a high debt-to-income ratio, even if you satisfy the minimum income requirements
You are self-employed
You recently changed your job or you have a variable income.
Benefits of having a cosigner
1. Strengthens loan application - When applying for a student loan, one can get rejected for application for a number of reasons, being having an unacceptable credit history or not meeting the income requirements. In order to make sure that you get approved for the loan, having a cosigner with a good credit history and stable employment would improve your chances of getting approved for the loan.
2. Improving credit score - Having a cosigner to share your responsibility of repaying your debts helps in improving your credit score as there won’t be risks of you not being able to make payments because the cosigner can help out in this way. It can also be beneficial to the cosigner as long as you are making timely payments which would reflect on the cosigner’s credit report.
This improvement in your credit will help you both to qualify for loans or any other type of credit to be acquired in the future.
3. Getting better deals - If your cosigner has really good credit, then your lender might consider lowering your interest rates which would result to making lower payments on your loans, hence helping you save money on the long run.
Responsibilities of a cosigner
Being a cosigner comes with a lot of responsibilities as they would have to put their financial position on the line for you. They are legally responsible for repaying the loan, which means that in the event of you not being able to pay back your loans, they have to do it on your behalf.
As a primary borrower, if you end up defaulting on your loans, it will ruin both your and your cosigner’s credit score. This is a big risk that your cosigner is taking and you owe it to them to be responsible for yourself and make timely payments.
Different states have different rules regarding the collection of debts. Some states try to collect debts from you and your cosigner at the same time, while others will go after your cosigner first, or even penalize them first in case of default, like wage garnishment. So always make sure you are aware of the state rules and also make the person you plan on asking to cosign your loans aware of all this information.
How to get somebody to cosign for you
1. The prep work - You must come off confident with the details to convince them that you have the ability to pay off the loan on your own and the cosigning is just a formality so as to get the loan sanctioned for you.
Since it is a big deal, people will appreciate the effort you put into pitching the idea of cosigning for you in a more professional way.
Try to think of it as your sales perspective. Mention that you have things worked out, show it to them, have it all written down or at least on your mind, and speak it out when you are explaining things to them.
Have contingency plans for any situations that they might come up with so that they know you've prepared well knowing what you are getting the two of you into.
2. Be truthful - The last thing you want is for your cosigner to find out after or before cosigning that you have bad finances and anything of a similar sort so don't shy away from letting them know about the important details and how you plan on going about fixing them.
Even though you have the right to decide what sort of a relationship you have with your cosigner, let them in on the details of your job and your income so that they know you possess the ability to repay your loans on time and they don't have to worry about keeping an eye on you.
3. Get an understanding - Understanding your loan and how it works, going through the terms, the payments to be made monthly, the eventual interest costs that you will pay over the duration of the loan and any other terms and conditions should be mentioned in the loan application.
Some lenders have the option where you may release the cosigner after a certain number of timely payments, you may put these details forward to have the cosigner be more inclined to cosign for you too.
4. Risks and how to deal with them - Understand that taking any loan is a big risk and there are additional risks that come along with that as well.
For example - Your credit score isn't the only one thing that is on the line if the payments don't go on time with your loan, the cosigner's credit score can also drop if you do not make monthly and timely payments.
So have them understand these risks, that in the event that anything happens, you have a fairly good idea on how to deal with it, as they may not be aware of the problems that you might face through the loan period.
What to do if you can't find a cosigner?
If you aren't able to find a cosigner no matter where you look for one, you have other options such as -
1. Credit gets you respect - Build credit while you are waiting to borrow money. If it is possible for you to wait to borrow money for a while then wait for it but also build your credit at that time. Get small loans and pay them off. Usually, this leads to the credit score going up as you are diligent in paying off your loans. repeat this for a while. You may even try cash secured loans which usually increases your chances of getting approved.
2. Get collateral that you can pledge - As long as you have something of value to pledge, even if it might be a risky bet, do it, but also keep in mind that in case things go wrong, you might lose your asset.
Lenders expect something that gives them the assurance that you won't take the loan and disappear. So when they have something that you value then they know in any such situation they can take your asset and sell it to recover some of their money.
For example - Many people pledge their houses or their cars which may end up in foreclosure and or even worse have their vehicle given away leaving them unable to go to work and earn an income.
3. Take less give more - You need to learn to borrow less, even though it might not be the first thing that's on your mind and you might want to consider taking extra just in case. But you need to learn to take just enough to suffice your needs and not your wants.
The smaller the loan is, the smaller the payments are. The smaller the payments are, the smaller the impact on your income statement. When the impact is less, you will not fret about having to deal with the payments to be made.
Risks associated with cosigning
The act of cosigning for someone can be considered in some ways to be very generous. But it also comes with a number of risks to the cosigner.
It is important that you and the person who cosigns for you to understand the risks that both of you are taking for the sake of the loan. If the stakes are cleared to both of you, you should be able to come to an understanding of what to do.
The following are the risks which a cosigner is subjected to-
1. Giving back what you borrowed - Since a cosigner is usually equally responsible for the loan as much as you are, in the situation where you fail to pay, they will be the next person who has to take up the job of loan payments. If you keep making late payments for a number of times, the lender will start collecting debts from the cosigner
2. High debt-to-income ratio - Even if it is you who have taken the loan, your cosigner’s credit report will also be affected as it will be reflected there along with the monthly payments that you are making. It means that the debt-to-income ratio will increase.
In the event of a default on the loan, the cosigner’s credit report will show a negative remark which will ruin their credit score making it difficult for them to acquire credit in the future. Also, a high debt-to-income ratio means lowering the credit score because the amount you owe makes up 30% of your FICO score. So make sure to keep your debt-to-income ratio less than 36% because if it exceeds, the credit score will drop.
3. Chance of ruining credit - If you end up making late payments or worse defaulting on your loans, the cosigner is equally responsible and it will show up on their credit report with a negative remark. They are also subjected to late fees on your behalf if you can’t pay them.
It will seriously take a toll on their credit score making it difficult for them to acquire more loans or other types of credit in the future. So make sure you are trustworthy and the cosigner can count on you, before signing them in to help with your loans.
4. Not qualifying for release - Even though a lot of lenders now offer cosigner release, there are a number of them which do not. Also, qualifying for release might take time as there are requirements like completing a certain number of payments to qualify for it.
Hence, this is a long term relationship the cosigners are getting themselves into. So, make sure you talk to your cosigner about all this before letting them sign up for something they might regret later.
5. Legal penalty - If the cosigner does not make payments, the lender has the legal right to take action against them. These actions being taken by them will also show up on their credit report which creates more problems.
Moreover, the lenders can also subject them to wage garnishment and take assets from their bank account if payments are not made voluntarily. Such risks should not be taken for granted.
6. Decreasing the capacity to borrow - Cosigning a loan means being responsible for making payments on those loans when you are not able to do so. The lenders will see the cosigner as the one who will make payments.
This means that the cosigner’s income will be reduced making it difficult for them to make payments on any new loans that they need to borrow, lowering the chance for them to qualify for such loans.
7. Amount paid more than the amount borrowed - During periods where you do not need to make payments like a grace period, deferment or forbearance, the interest amount keeps accruing which capitalizes later on. This makes the loan amount to be paid costlier than the original amount borrowed. This amount is also payable by the cosigner so make sure they know about it.
8. Destroy relationships - Even though a parent-child cosigner relationship might not get that much affected because of any mistake like defaulting on your loans, still your parents will be disappointed and might get angry at you.
Apart from that, relationships with your other relatives or friends might get seriously affected as they would lose their trust on you because their financial position will be hampered if you are not responsible and you will end up defaulting on your loans.
Managing the risks of a cosigner
When a cosigner is ready to help their borrowers with their loans, they should be aware of all the risks and responsibilities that they are getting themselves into.
The following are some of the measures to manage such risks-
1. Used up federal options - Make sure that you’ve used to the maximum every federal benefit you qualify for - scholarships, grants, work-study, and federal loans, before going for private loans which needs a cosigner. Federal loans don’t usually require a cosigner and has additional benefits like more options of repayment plans, deferment, or forbearance.
If that is not enough to cover the educational expenses, a parent or guardian can opt for a Parent PLUS Loan.
2. Borrow less - Don’t borrow more than the amount required and make sure it doesn’t exceed the amount of anticipated salary per year you receive after graduation.
For example - If you anticipate getting an annual salary of $50,000, then make sure to take student loans lower than that amount while you are still in school.
3. Agreement to repay - The cosigner should have the borrower sign an agreement to make sure that the borrower pays them back for any amount they cover on their behalf while cosigning the loan. In this case, if the cosigner were ever to get legal action, they could recover some or all of their losses.
4. Stay ahead of the debt - Make regular payments on time by signing up for automatic payments so that you won’t have yourself and your cosigner face any late payment charges.
5. Awareness - Make sure that you let the cosigner know about all the terms and conditions applicable to them as per the loan. Pay attention to detail like what will lead to a default or if there is any flexibility in the repayment options. Also, you should be aware of additional information like if there is a death or disability discharge, etc.
6. Cosigner release - Make sure to ask if the lender provides a cosigner release which allows the cosigner to be free from their obligation after a certain period of time.
To qualify for one, you should be able to complete a particular number of monthly payments or achieve an acceptable credit score along with other requirements as per the lender.
It will also benefit you because in the case where the cosigner passed away, you would be asked by the lender to make payments for the remaining amount of your loan in full.
7. Examine your finances - Make sure that you have enough funds to make monthly payments for your loans so that you don’t put yourself as well as your cosigner at risk.
Keep track of all your payments and let your cosigner know about it in order to be ahead and avoid any penalties, fines or fees.
When can one consider cosigning?
Even though cosigning comes with a number of risks, doing it might actually be of great help to the student borrower. Evaluate the situation by taking into consideration the risks and other factors involved to find out if it is the best thing to do.
The following explains the situation when a person can actually consider being a cosigner-
The risks can be managed - In case the person is able to manage and afford the risks involved, then they can actually consider being a cosigner. This might be the case if they have excessive cash inflow and necessary assets that can be used to pay off the loan if the borrower defaults
It has to be proved to the lenders (adequate income and assets) in order to be eligible for any future borrowing. Even though one is able to afford risks at present, they should also know that they have to be able to withstand any sudden future losses.
Cosigning for the benefit of one’s child - If a parent with a stable income and good credit score wants to cosign for their child to get the education they want, then it makes sense to do so. Parents would always want what’s best for their child, so cosigning for a loan to benefit their children would be their pleasure.
Helping hand - If the person just wants to give a helping hand to their child, niece, nephew, cousin, friends or anyone, with their student loans then they can be a cosigner. Again, they should be able to take the risks, have the required income and be prepared for any unforeseen event.
Not planning to borrow anytime soon - If the person doesn’t have any plan of taking future credit, then they can act as a cosigner for the borrower’s loan. Cosigning increases the debt-to-income ratio so one might find it difficult to qualify for any future loans for themselves before the loan they cosigned for is paid off.
Options to consider instead of cosigning
Before going for a cosigner, you can explore other options to find out if they work better-
1. Down payment - You can actually ask your parents or anyone who is willing to help to make down payments instead of cosigning. This would reduce your monthly payments making it easier for you to be eligible for a loan even with limited income. But, you need to be sure that they have enough funds in hand and are willing to make the payment on your behalf. Make an agreement in a paper if they want you to pay them the money back.
2. Borrow - You can actually ask your parents, relatives or anyone willing to help you to lend you the money for pursuing your education instead of going for official loans. It can be of big help especially if you feel like you won’t be able to pay the lenders back. With your closed ones helping you out, you can make an agreement and pay them back when it is convenient for you.
But make sure to have the agreement in writing to avoid any conflict as it can destroy your relationships. Also, it can be difficult for you to build your credit unless you report the payments you make to the credit bureaus.
3. Pledge Collateral - Putting forth any valuable possession of yours which the lender will accept in order to approve you the loan means pledging collateral. This acts security that you will be able to repay the loan.
One should keep in mind the risk involved in this option because if you end up defaulting on your loan, you might end up losing the collateral putting you in an even worse situation.
4. Borrowing less - Borrowing at a lower amount proves higher chances of getting you approved for a loan. This is due to the fact that a smaller loan amount means a lesser amount of payments to be made which is easier to support with your income and credit score.
5. Delay your loan application - If you are not able to qualify for a loan without a cosigner and you feel that you are not in a good enough financial state to repay off the loans even with a cosigner in place, then it is better that you accept the rejection and wait till you are well enough to qualify for it.
Anything that stopped you from getting approved, like unacceptable credit history, destroyed credit score, or not enough income is earned, you can actually work on it and improve upon it before trying again for the loan.
Do you think you should pay for a co-signer?
There are many ways to get someone to sign for you as a cosigner. It also includes some individuals or services that offer to assign or get you a cosigner if you pay them for it. There usually is a small fee for getting a cosigner to sign for you.
Be aware of the risk to reward trade-off and how it will be sensible for the co-signer. You will only pay a small fee and the cosigner will be responsible for 100% of your loan. Understand how that makes sense for anybody.
Also, this usually ends up taking you to sites such as craigslist where you are promised a cosigner but may end up getting a con artist.
Be careful with those that ask for your bank details such as account number and more, and also those demanding an upfront payment with no way for you to ensure that they go through with the deal.
Are cosigners necessary?
Although most private loans require you to have a cosigner, Federal Loans usually don’t need you to have a cosigner on board for getting your student loans approved.
It is agreeable that having a cosigner can be quite helpful as they can cover for you in case you are facing financial difficulty, but it is not necessary to have one. You can talk to your lenders about it.
If you have the option of moving forward with your loans without the help of a cosigner, then it is better to take it as you would be responsible for it on your own without putting anyone’s financial position at risk.
Make sure you talk to your lender about the various options you can opt for in case you are not able to make payments. Use these options instead if you feel they can help you better than going for a cosigner.