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Before You Cosign on the Dotted Line for that Student Loan …

Key Takeaways

  • Private student loans are loans offered by banks, credit unions, and other lenders to help supplement college costs.
  • Cosigning for a private loan means that you’re responsible for the loan if the borrower defaults.
  • Because rates for private loans are often higher, it’s wise to have students exhaust all federal loan options first.

By Gina Gallagher | Citizens Bank Contributor

College doesn’t come cheap. That’s why, to make higher education possible, many families are turning to private loans — loans offered by lenders to help bridge the gap where federal student aid leaves off. But qualifying for a private loan requires a borrower to have a solid credit rating and steady income — and more often than not, a creditworthy cosigner who can provide them. But is cosigning a private loan a smart financial decision for you? To make that determination, you need to fully understand what’s involved.

What is a cosigner?

Any person with a qualifying credit score can cosign a loan, but if you’re a parent of a college-age student, it likely could be you. If you do decide to cosign, you’re essentially taking on responsibility for paying back the loan in the event your student can’t. Because of this, cosigning is very much like taking a loan out for yourself.

How will cosigning help your student?

Having a cosigner offers valuable benefits for the student, including:

  • Easier qualifying. Most private loans require an established credit history and steady income, so in all likelihood a student would not qualify for a private loan without a cosigner.
  • A lower interest rate. When you cosign a loan, your credit rating will be considered. So if you have a good or excellent credit rating in the high 700s or above, the student can qualify for a more favorable rate. A lower rate means lower monthly payments and less interest paid over the life of the loan.
  • An opportunity to build credit. In some cases, you could be released as cosigner if the student makes on-time, consecutive monthly payments over a specific period of time. Favorable loan repayment terms will allow the student to build a credit history, which helps them get a job, rent an apartment, obtain additional credit, and otherwise reach their financial goals later on in life.

What are the disadvantages of cosigning?

While cosigning offers benefits to the student, there are some significant disadvantages to you, including:

  • Increased risk and financial responsibility. If the student can’t pay the loan, or continues to make late payments, you may have to assume responsibility. So before you cosign, you should ask yourself if you could afford to make the payments. If the answer is “No,” you don’t want to cosign.
  • Credit rating impact. Even when you just apply for a loan as a cosigner, your credit score will be impacted as the lender will do a hard pull on your credit. If you’re approved, the loan will increase the debt in your debt-to-income ratio, which could impact your credit score. Additionally, if the borrower misses or is late on even just one payment, your credit score could be damaged.
  • Inability to obtain future credit. Having a sizable loan could also impact your ability to qualify for loans that you may need for the future, such as a mortgage, car loan, or even a credit card.

Is a private loan the best option for you and the student?

Given the risks involved with cosigning a private loan, it’s important for you and the student to exhaust all other options first, including federal aid: scholarships, grants, work-study, and other federal loan options. Federal loans offer some features that make them an attractive alternative, including:

  • Fixed rates, as opposed to variable interest rates, that are usually lower than those offered by private lenders.
  • The ability for the student to get a loan without a cosigner.
  • Deferment and repayment options that allow students to pay back funds after graduation.

Since federal loans have limits on the amount students can borrow, you may consider getting a Parent Loan for Undergraduate Students (PLUS) to supplement costs (also known as federal Direct PLUS loans). Unlike private loans, PLUS loans are in the parents’ name only and often have fixed interest rates and more flexible terms. However, parent PLUS loans have downsides too. They charge hefty origination fees, have relatively high rates compared to private loans, and only offer fixed rate options.

What are the differences between private student loans and federal student loans?

Federal Loan

Private Loan

How to apply

Complete the Federal Application for Student Aid (FAFSA®)

Apply with a bank, credit union, or other financial institution

Amount you can borrow

Determined by information on FAFSA

Varies by lender and education costs

Student credit history required

No

Yes

Cosigner required

No

Yes, if borrower’s credit history, income, and other factors don’t meet lender’s requirements

Interest rate type

Fixed

Fixed and variable options

Origination Fees

Yes
(4.236%)

None

Rates

7.08%
Fixed APR

6.49%
Fixed APR1

Lower rates based on credit profile

No

Yes

What steps should you take if you decide to cosign?

If, after exhausting all your federal options and reviewing your own personal finances, you wish to proceed with cosigning for a private loan, take these important steps:

  • Do your homework. Private loan programs usually offer variable and fixed interest rates that vary by lender. Keep in mind, though, that just because a rate is low doesn’t mean it will stay low. Variable rates are subject to change, so if you want predictable monthly payments over the entire loan term, consider a fixed-rate option. If you have a credit score in the high 600s or above, you should be able to capitalize on lower rates compared to federal loan rates. Also, when reviewing options, make sure you’re familiar with the terms of the loan and the default conditions.
  • Discuss the borrowing responsibility with the student. The student should fully understand the implications of taking out a loan and the importance of making payments on time. Even one missed payment could result in a negative mark on your credit. They should also understand how much money they will need to pay each month and when payments will be due.
  • Have the student enroll in automatic payments. Because you’re liable for the loan if the student doesn’t pay, it’s a good idea to arrange to have the student enroll in automatic payments, which will help to ensure they pay on time.
  • Get a cosigner release. To help students build credit, some loans offer a cosigner release, which allows the cosigner to be released from the loan if the student meets certain conditions. Another good option is for the student to refinance the cosigned loan with a private lender.
  • Monitor the loan payments. Since your credit report will be impacted, it’s important to stay on top of the loan and ensure the student is making payments on time.

Ready to learn about all the ways to make education possible?

Cosigning for a private loan is a big financial step that should be carefully considered. To review other student loan options or to determine if cosigning makes sense for your unique situation, call 1-888-411-0266 to speak with a Student Lending Advisor.

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