If you are expecting to fund college with a private student loan, you’ll likely encounter the problem of finding an eligible cosigner. Although students should always seek federal student aid as a first step to funding their education, total private student loan debt in the U.S. still hovers around $11 billion. It clearly still fills the gaps in funding.
How do you choose a good cosigner? Family members are often the first place to look, including parents, siblings, and grandparents. But what about aunts and uncles? How could asking an aunt or uncle to cosign be of benefit to you? There are some pros and cons to consider before approaching any family members with this decision.
Choosing Your Private Student Loan Cosigner
Choosing a cosigner on your student loan is not a decision to take lightly. It’s essentially entering into a binding agreement with someone, which can have long-lasting ramifications on your finances.
Cosigners are required for almost all private student loans today, close to 90 percent of them, according to the Consumer Financial Protection Bureau. Cosigners are often required when the primary borrower has no credit or poor credit. On the other hand, federal student loans do not require a cosigner to take on the risk, except under exceptional circumstances.
Who Can Be a Cosigner on a Private Student Loan?
Cosigners are almost always family members. However, they can technically be anyone you know: a friend, a co-worker, your neighbor. Considering it is a binding contractual agreement, the stronger the relationship beforehand, the better. This is why many students seek the help of family members like aunts and uncles.
What Do Lenders Require of Cosigners?
Although the general eligibility requirements will vary from one lender to the next, a cosigner usually must meet the following basic criteria:
- Legal age
- Consistent income
- U.S. citizen, or in some cases a permanent resident
- Established credit history
Cosigners need to have good credit standing to be of benefit to a borrower. They are essentially sharing their good credit to secure the loan. They must take over the loan payments if at any point the primary borrower can no longer make them.
Things for the Cosigner to Consider
Cosigners should consider their relationship with the borrower; can it weather the potential stress that a binding financial contract may place on it? Openly discuss who will make the student’s payments during school, and the expectations of both parties. The more open communication, the less chance of problems later.
It's also important to consider your financial future. Do you expect to change jobs, or retire during the student loan? Could this affect your ability to make the on-time payments? Keep in mind student loans usually have repayment terms of 10 to 20 years.
Things for the Borrower to Consider
The most important thing to consider is your expectations for this financial agreement. As stated, it's important to lay out precisely who is expected to make payments, and when. If one of you goes through a financial hardship, can the other pick up the slack?
What Cosigner Rules Give You the Most Borrower Protection
Some private student loan lenders do give cosigners the option of getting released from loans once specific requirements are met. Usually, this means after a certain number of years, or after a certain number of on-time payments are made. Understand the rules for your specific student loan before signing the contract.
How to Get a Private Student Loan Without a Cosigner
There are virtually only two ways to get a student loan without a cosigner. The first is to secure federal student aid by way of the Free Application for Federal Student Aid. These loans typically are not based on credit history and have no cosigner requirement. Once all federal aid is exhausted, then it’s safe to pursue other types of student aid.
The second method is seeking out private student loans, but you typically must have a lengthy credit history and excellent credit rating to avoid the cosigner requirement. If you are unsure of your credit history and score, you can check for free through any of the three main credit reporting agencies: Equifax, Experian, or TransUnion.
Parents might want to consider adding their teenager as an authorized user on a credit card to help them start building credit history early. The sooner, the better.
Not all credit cards provide this service, and some have age restrictions. Speak with the credit card company directly to explore options and find out how they report cosigner data to credit reporting agencies.