If your student’s applying for a private student loan, chances are they’ll need a cosigner—someone who’s responsible to repay the loan if they don’t. Here are some things you should know before you cosign a student loan.
1. Cosigners are often needed for private student loans. not federal student loans
Private student loans are credit-based; the financial institution (a bank or credit union) checks out a borrower’s credit history, along with other factors, before they lend money. Federal undergraduate student loans aren’t credit-based; they’re made from the information you and your student submit in the Free Application for Federal Student Aid (FAFSA). Note that federal PLUS Loans for parents and grad students do allow a cosigner.
2. A lender looks at a borrower's credit history to determine the level of risk
When a bank lends money, they want to make sure the primary borrower and the cosigner have the ability to pay it back. They’ll look at your credit history, including the credit report and credit score, and other factors. Have you made payments on time? How much outstanding debt do you have? Have you had any bankruptcies or defaulted on a loan?
3. Students may need a loan–but they probably don't have a credit history
Lenders understand this, so that’s where you come in. When you’re added as a cosigner the lender has more assurance that the loan will be repaid. Your credit history is evaluated along with your student’s; the combination of both can give the student a better chance of being approved for a loan—maybe at a lower interest rate.
4. You're jointly–and legally–responsible for the loan
Deciding to cosign a loan is an important decision. It’s a legally binding agreement that you’re willing to share the responsibility of repaying the loan on time and in full. So, if your student doesn’t make payments for any reason, you’ll be expected to make them. Missed payments can adversely impact your credit report as well as your student’s.
5. Cosigner's don't have to be parents
The CFPB defines a cosigner as “a person—such as a parent, close family member or friend—who pledges to pay back the loan if you do not.”1 Whether you’re a parent, guardian, grandparent, or spouse, the most important requirement is that you’re creditworthy and understand/accept your responsibilities. Only one person can cosign for a private student loan. For instance, if two parents are willing to be cosigners, only one will be able to do it.
6. There are benefits to cosigning a loan for your student
- It helps them start to establish and build credit in their own name. Then, when it’s time to get a car loan, mortgage, or credit card, they’ll have a better chance of getting approved and receiving a lower rate.
- It can help them develop good financial habits.
- It gives them responsibility for their own debt.
7. Being a cosigner doesn't have to be a lifelong responsibility
Some private lenders allow a borrower to release their cosigner after a period of time—each lender has different requirements. With Sallie Mae, a student can apply to release you as a cosigner after they
- Make 12 on-time principal and interest repayments
- Meet certain credit requirements, like passing a credit review2
Cosigning a loan for your student can be a huge help to them if they don’t yet have a strong credit history. Before borrowing, make sure both of you understand how the process works—and who’s responsible for repaying the loan.