Before embarking on your college journey, most students today need at least some form of financial aid to afford the steep tuition fees. All students are encouraged to submit a Free Application for Federal Student Aid as the first step in the process. If approved, students may gain access to grants, or they might be approved for a federal student loan. Federal loans under most circumstances do not require a cosigner.
But what happens if you don’t receive enough – or any – assistance from the federal government? Once federal options are exhausted, many students turn toward private student loans to pay for college.
Having access to private student loans can mean the difference between attending college or not. But according to statistics from the Consumer Financial Protection Bureau (CFPB), 90 percent of private student loans required a cosigner.
Who Can Cosign Your Private Student Loan?
Cosigners are a way for students with little financial history, or poor credit, to secure financial assistance. A cosigner essentially is sharing their presumably good credit score with the borrower to meet the requirements. They are also sharing the burden of responsibility.
Technically you can get almost anyone to become your student loan cosigner. Your mother, your father, aunt or uncle, grandparents, and even friends can all sign the dotted line. But getting a cosigner isn’t as easy as a quick signature.
Whatever the agreement is between the borrower and the cosigner, the repayment terms need to be met on time and in full. If the borrower falls behind on payments, a cosigner is technically on the hook for the outstanding debt.
According to the CFPB, parents and other family members are the most common cosigners on student loan debt. With such a long credit history, grandparents are often asked to help out a grandchild. In fact, in the decade leading up to 2015, consumers over the age of 60 were the fastest-growing sector of society taking out student loans.
The Dangers of Cosigning for Grandparents
Getting a grandparent to sign as a cosigner may lead to some serious issues. What if your grandparent retires and their income drops? What if they become sick and can no longer help you with payments when you need it? What if they pass away?
The CFPB has received a number of recent complaints about cosigners dying, and loans going into automatic default. This is even despite the fact that it's in good standing and payments have been made on time and in full. Some lenders seem to have an automatic default status if a cosigner dies. Not only will the borrower be mourning the loss of their loved one, but they might also face significant financial losses.
Or, if the borrower falls behind on payments, the grandparent-cosigner will be saddled with the debt – which could create a serious financial hardship for them.
What is a Cosigner Release?
Many of the complaints received by the CFPB about private student loans are about the issue of cosigner release. Firstly, not all private student loans offer the option of cosigner release, and when they do it’s often a convoluted process. Information on lenders’ cosigner release policies is rarely available online.
Some lenders have standard prerequisites in place before release, such as making a certain number of on-time payments or after a set period of time. Be sure to speak with your bank in person about the release process before signing any paperwork. To secure a release, the borrower will likely need to prove they can continue making on-time payments by themselves, which means having a steady income and a good credit score.
What to Look for in the Fine Print
Before asking your grandmother or grandfather to jump onboard to your student loan debt, consider every detail in the fine print. Because cosigner release information isn’t typically advertised, dig it out of the contract and be sure to understand the release terms before signing.
Finally, although you may not want to consider it now, there may come a time when your cosigner passes away. The fine print will have details on what happens to the loan at this time, whether it needs to be paid immediately in full, or if it goes into automatic default. This often also applies if the cosigner files for bankruptcy.
It's best to know all the details in advance of signing. Depending on the type of student loan and the details you've dug up in the fine print, a grandparent might not make the best first option for a cosigner. Alternatively, a student might also be able to find a private student loan without a cosigner.