Being a Co-Signer for a Student Loan
Becoming a co-signer on a student loan for a friend or family member can be a very charitable gesture. But co-signing a student loan for someone is more than just giving your signature. You are putting your financial history on the line for that person. Before you sign your name on that line, there are a few things you should know about being a co-signer.
A co-signer (or co-applicant) is a person who signs and is responsible for the loan in addition to the borrower. While the bills are typically sent to the student borrower, the co-signer is equally liable for the loan. Most students will need a U.S. co-signer for a private student loan unless they are employed full-time while in school and meet additional income and credit requirements.
Having a co-signer for a loan will help in two very important ways. If you don’t have an established credit history yet, applying with a creditworthy cosigner may help you get the loan you are after. The second reason to have a cosigner is you may be eligible for a lower interest rate on your loan.
Most co-signers don’t realize that the loan in question will be displayed on their credit report. Be careful because this might affect your ability to get your own loan in the future as the student loan you co-signed on will be used to calculate your debt-to-income ratio. Debt-to-income ratio is the percentage of a person’s monthly gross income that goes toward paying debts. Too high of a debt-to-income ratio and lenders will think twice about giving you a loan.
That same loan can also affect the interest rate you get on your own loans too. After a set amount of making on time payments the borrower can, and should, attempt to redo the loan only under their own name. This will release you from the loan and, in turn, have a positive affect on your credit rating.
Since the loan can both positively and negatively impact the credit rating of the co-signer, the co-signer should have access to the loan information. This will allow you to find out what has been paid on the loan and what is still owed. To minimize risk to your credit, make sure the lender will inform you of late payments or non-payment issues in regards to the borrower as soon as they happen. Too often co-signers don’t know that there is an issue with the loan until it has already impacted their credit and by then its too late.
Most co-signers are also parents who co-sign for their children’s student loans. If this is the case, it is still important that you carefully review the need for the money as well as their spending patterns. When you give your signature, its your loan too. Always weigh your options and make the smart decision.
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Generally there are two circumstances when a cosigner is needed, even if the borrower has some credit. One of those times is when the borrower does not have an established credit history which leads to a low credit score. Having a cosigner when applying for private student loans such as a Sallie Mae Signature Loan or a Tuition Answer Loan may increase your odds of being approved.
The second circumstance to use a cosigner would be to obtain a loan with a lower interest rate. The difference in monthly payments on a $10,000 loan can be $50 or more when comparing a 8% interest rate and a 12% interest rate. Also the difference in the accrued interest rate could be as much as $4900 over the life of the loan. Certainly something to give thought to!