If you need a private student loan, it is essential to find the right cosigner.
Most college students will need the help of a cosigner to get a private loan. However, selecting the wrong cosigner can cause future financial troubles and jeopardize a meaningful relationship.
Though there are hurdles to overcome, it is possible to find a good fit. For the students unable to locate a cosigner, there are ways to pay for school without a cosigner.
Finding A Good Cosigner for Private Student Loans
Before we jump into the different ways someone could find a student loan cosigner, we should first consider what to look for in a cosigner.
Ideally, a good cosigner would have the following qualifications:
- Good Credit Score and Debt-to-Income Ratio (DTI) – A cosigner must pass a credit check. If lenders consider a cosigner applicant to be a credit risk, they will deny the application. Additionally, the credit score and DTI of the cosigner can impact the interest rate offered by the lender. The better the cosigner’s credit profile, the better the interest rate.
- A Solid Relationship with the Borrower – Cosigning is a significant financial commitment. Discussing finances can be very personal to some people, but borrowers must discuss finances in detail with their cosigner.
- Long-Term Financial Security – If a potential cosigner is about to buy a new house or start a new business, they might not be in a position to add any extra debt to their credit report. An ideal cosigner won’t need to borrow money for many years.
- Able to Understand the Commitment – The impact of cosigning a student loan can be complicated. An elderly relative may not understand how cosigning a loan could affect them. Other family members may think you took advantage of your cosigner.
- A Calm, Relaxed Attitude – Cosigner/borrower relationships can be tricky, especially if the borrower has trouble finding a job after college. You don’t want a cosigner who will judge every purchase you make until the loan is repaid.
Don’t Forget Federal Student Loans: Cosigners are only required on private loans. Federal loans are almost always a better choice because of the extensive benefits and protections available to federal borrowers. Before asking anyone to cosign, make sure you have first maximized all federal options.
Parents Are Not the Only People to Consider as Cosigners
Parents – Parents are the most common choice as cosigners. If they can’t cosign, they could provide assistance by talking with other family members and family friends.
Aunts, Uncles, and Grandparents – Reaching out to the extended family may help. However, it is essential to remember that even for people with perfect credit, there is a limit to how much debt they can cosign. Grandparents may not want to cosign loans if they can’t do it for all the grandchildren. Your Aunts and Uncles may have children of their own and be unable to cosign.
Brothers and Sisters that have Finished School – Siblings that are out of school may be a surprisingly good option. They will understand the challenge of finding a cosigner. Depending upon where they are financially, they may be in a position to help.
Employers – Many employers have programs to pay for employee tuition. Guaranteeing a loan is less of a financial commitment. This approach may be a long shot, especially at bigger companies with a large bureaucracy. However, it is worth trying, especially if the employer directly benefits from the additional education.
Close Family Friends – Thus far, most suggestions have been family members. However, many people have friends that are as close, or closer, than their family. There is no requirement that a cosigner be a family member.
Have a Plan for Paying for School and Repaying the Debt
When you ask someone to cosign a loan, you are asking them to make a major financial commitment. Cosigners get nothing in return for taking on this risk.
As a potential borrower, you can put the cosigner at ease by having a detailed plan for handling the debt.
Your detailed plan should include the following:
- How much do you need to borrow for this year?
- Will you need to borrow more in future years?
- How much do you expect to earn after graduation?
- How long will it take to repay the student loans?
- What will you do if you can’t find a job?
One of the best tools for preparing for the cosigner discussion is the College Scorecard. The College Scorecard is a service of the Department of Education. It contains detailed information, sorted by school and major, included expected costs, starting salary, and average debt levels.
Be Honest About the Downsides to Cosigning
Students looking for a cosigner should be honest about the potential downsides to cosigning. If you ask someone to cosign, and they think they are being duped or misled, they are far less likely to cosign the loan.
The big risk for cosigners is that they get stuck making payments because the borrower fell behind.
However, there are additional risks. Cosigners will usually see a brief drop in their credit score from the initial application, but further negative consequences are possible.
Another major issue with cosigning is the impact on the cosigner’s Debt-to-Income Ratio or DTI. Even though the borrower has the primary responsibility to make payments, the loan still appears on the cosigner’s credit report. This will hurt the cosigner’s DTI, potentially making it harder to qualify for a mortgage.
Changes to the cosigner’s DTI will also make it harder to cosign future loans. This problem may be especially severe for large families, but it should also be considered for first-year students who will need to borrow for several more years.
Hiring a Cosigner or Finding a Cosigner Online
This has been a growing trend in recent years. It is also incredibly stupid.
As a cosigner, it is a terrible decision to cosign the loan of a stranger. If they decide to skip town without making payments, you are on the hook for the full balance of the loan. If someone has resorted to finding a cosigner online, it means lenders view them as too much of a risk to give them a loan AND nobody in their life was willing to cosign the loan. Getting paid to cosign a stranger’s loan is extremely risky.
As a borrower, you might be ok with someone else taking on this risk. Because cosigning a stranger’s loan is such a dumb decision, borrowers should be highly suspect of anyone willing to provide this “service.” Is it a scam? What happens if the cosigner doesn’t get approved? What happens if the cosigner cancels the loan after they have been paid?
Paid cosigners are a bad idea.
The only reason such a concept even exists is that some people are truly desperate. Such desperation can lead to awful decisions. Don’t make this particular mistake.
Cosigner Release Options
Lenders like to advertise that they have generous cosigner release programs.
They may claim that cosigners can be released from the loan after as little as 12 months of on-time payments from the borrower.
Unfortunately, securing a cosigner release can be extremely difficult. All cosigner release programs require the borrower to pass a credit check before the release is approved.
Lenders have little incentive to grant the borrower a release. With a cosigner, they have two people legally responsible for the debt. If they approve the release application, only one person is legally responsible. Thus, lenders have a huge incentive to look for any reason to deny the application. A report from the Consumer Financial Protection Bureau found that 90% of cosigner release applications were rejected.
While there are better alternatives to getting a cosigner release, it is a mistake to assume that a release will be granted before the loan is paid in full.
How to Thank Your Cosigner
If you are lucky enough to find a cosigner, there are several ways to say thanks.
The best way to thank a cosigner is to make sure you never miss a payment. Cosigners don’t want to get calls from lenders about missed payments. Don’t make them worry that they might have to take over the monthly bill.
If you are going to miss a payment, let your cosigner know in advance. They may have suggestions to help. As the borrower, you don’t want your cosigner getting a surprise call from the lender. Here again, transparency is key.
Think about a life insurance policy. Not all student loans are automatically discharged if the borrower dies. If you pass unexpectedly, you don’t want to leave your cosigner with your student debt. For a healthy young person, a life insurance policy is cheap. Name your cosigner as a beneficiary for an amount larger than the balance of the student loan. Be sure to explain to your cosigner why the policy is in place so that there are no surprises.
Finally, just say thanks to your cosigner. If someone is cosigning a loan for you, it is because they care. Cosigning has no benefit to the cosigner and comes with significant risk. Cosigning is a selfless act. Let your cosigner know that you appreciate their sacrifice.
Finding Cosigners for Student Loan Refinancing
Thus far, we have focused on finding a cosigner for an in-school private student loan. However, this is not the only circumstance where a cosigner enters the equation.
In a student loan refinance, borrowers may seek the help of a cosigner to get approved or to get a lower interest rate.
There are two aspects of cosigning on a refinance loan that are different from cosigning on an in-school loan.
- Help from a cosigner is not essential to paying for school. At the point somebody is refinancing their loans, they have finished college. Refinancing is done to lower interest rates and make payments more affordable. It is less of a necessity than finding an in-school loan in order to finish a degree.
- There is a natural cosigner to refinance loans. The best candidate to cosign a refinance loan is the cosigner on the original loan. By refinancing, a borrower can secure better loan terms and increase the likelihood that they repay the loan in full. This change is to the benefit of the original cosigner.
What to do if you Can’t Find a Student Loan Cosigner
No cosigner loans are a popular subject, but they don’t really exist. If you are a student without a job and have little to no credit history, you will need a cosigner.
I’d offer two suggestions for people who can’t find a cosigner.
First, make sure you are not overspending on your education. If your school can’t help you find the money you need to attend between scholarships, grants, and federal aid, the price of admission might not be worth it. Nobody wants to think of this possibility, but cosigner desperation could be a red flag that you are at the wrong school.
Second, consider looking into an Income-Share Agreement or ISA. ISA companies will provide students the funds they need for college in exchange for a portion of the student’s future income. Stride Funding is perhaps the best know ISA company. This site has previously reviewed Stride Funding and compared ISAs to Student Loans.