If you’re thinking about taking out a private student loan for college, chances are you’ll need a cosigner to get one. Very few students meet the qualifications for securing a loan on their own. In fact, the Consumer Financial Protection Bureau reports that about 90 percent of new private loans require a cosigner. A good student loan cosigner can not only help you secure a student loan, but also obtain a more favorable interest rate. It’s important, however, to understand the risks a cosigner assumes when he or she agrees to help you obtain a loan. He or she will be equally responsible for paying off the debt, even if you don’t finish college. Should you fail to make payments, your cosigner will be required to not only cover the past due amount, but also any interest fees and other charges that have been assessed. You should only turn to private students loans with a cosigner once you have exhausted all other possible funding sources, such as federal student loans and scholarships. If you do need to pursue a private student loan, here are a few things to consider before asking someone to set up as your cosigner.
1. Credit History
After the financial and credit crisis of 2008, it became more difficult to qualify for unsecured consumer credit. In the case of private student loans, most borrowers will need a cosigner who has a favorable credit history and a reliable source of income. Your cosigner should have a low debt to income (DTI) ratio, as well as a history of making payments on time. Lenders are more likely to approve your loan if your cosigner’s credit score is 720 or higher. If your cosigner has a credit score between 680 and 720, he or she may still be able to help you secure a loan, but the interest rate will probably be higher.
Along with a good credit history, lenders will also look at the stability of your cosigner. This includes job history, as well as the length of time your cosigner has lived in his or her home. You’ll want to choose someone who has worked for the same company for at least a year, if not longer, and has verifiable income. The longer he or she has lived in the area, and maintained a steady income, the better your chances are of securing a private student loan.
3. Good Health
Believe it or not, the age and health of your cosigner does matter. Maybe not so much to the lender, but it should be something you take into consideration. If you choose a cosigner who is in poor health, or over the age of 65, you may be in for an unpleasant surprise later on. Why? Some lenders include a clause in your student loan agreement that allows them to demand your loan be paid in full upon the death of your cosigner. Or worse, the lender could place your loan in default, even though you have made all your payments on time. This can happen automatically, without any notice, and effectively ruin your credit.
You may think that your parents are the only ones who can cosign a loan for you, but that is not the case. Other relatives, including siblings and cousins, as well as a friend or a spouse, may act as your cosigner. Basically, anyone with a good credit history and the willingness to help you could act as your cosigner. Just remember that this is a binding contract. If you fail to make your payments or default, you run the risk of not only ruining your credit and your cosigner’s, but also destroying your relationship.
It might be a good idea to draft a contract prior to asking someone to act as your cosigner. You could include specific details about how you plan to repay the debt, such as setting up automatic payments, as well as a clause that states you will reimburse any missed payments and/or fees covered over the life of the loan. It’s not required, but it may give your cosigner some peace of mind. Finally, don’t forget to thank your cosigner for helping you out. It’s a serious commitment to make and one that should not be taken lightly.