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What You Should Know Before Cosigning a Private Student Loan
Published June 17, 2022
What Is a Cosigner on a Private Student Loan?
A cosigner is someone who signs the private loan along with the student borrower. They’re legally obligated to repay the loan if the student fails to make payments. Anyone who is willing to can cosign a private loan (parents, grandparents, other relatives, close friends). Typically, the better the cosigner’s credit, the lower the interest rate for the loan.
When Is a Cosigner Required on a Private Student Loan?
A cosigner is usually required on a private student loan if the undergraduate student doesn’t have a strong credit history or regular income.
What Are the Risks of Cosigning a Student Loan?
The risks of cosigning a student loan are:
- The lender will order a hard credit check on the cosigner. This will result in an immediate hit to the cosigner’s credit score.
- Once the loan has been issued, the debt gets added to the cosigner’s debt-to-income ratio. Cosigners should keep this in mind if they have multiple children and will need to cosign for their student loans.
- A cosigner is responsible for making the monthly payments in the event the student can’t or won’t. If neither the cosigner nor the student makes payments, the loan will default, be sent to a collection agency, and show on both their credit reports.
- A cosigner will be fully responsible for making payments if the student borrower passes away.
What Does Cosigner Release Mean?
A cosigner release means the consignor is released from any legal obligation to pay back the loan once the terms of the release have been met. This would remove the cosigner’s name from the loan, and the debt would no longer show on the cosigner’s credit report.
Lenders usually require anywhere from 12–48 months of on-time payments to be made before a borrower can qualify for cosigner release. In addition, they may require the student borrower to pass a new credit check, including credit history and debt-to-income ratio.
Not all private lenders offer cosigner release. Before signing for a loan, be sure to ask if this is an option, and what the terms are.
Summary: Once students have exhausted their federal student loan options, many families turn to private student loans to cover the funding gap. If your student needs a private loan to cover the expenses of college, make sure you understand the responsibilities of being a cosigner.
Have a conversation with your student about the amount they will be borrowing and if they expect to be able to make the monthly payments after graduation.
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