Most students who enroll in college soon after graduating from high school have a thin or nonexistent credit history. If they do have a credit history, it is generally a bad one. If the student’s credit scores and credit history do not satisfy the credit underwriting criteria for a private student loan or if the student is under the age of majority for the student’s state of legal residence, the lender might not approve the loan. If so, the borrower can reapply with a creditworthy cosigner.
A cosigner agrees to repay the loan if the student is unable or unwilling to make the loan payments. Most lenders of private student loans will base eligibility on the higher credit score of the borrower and cosigner. A cosigner can often enable a borrower with a weak or non-existent credit history to qualify for a loan.
Even if the borrower could qualify for the loan without a cosigner, adding a cosigner might enable the borrower to get a better interest rate, if the cosigner has a higher credit score than the borrower. The loan interest rates and fees are based on the higher of the two credit scores. Some lenders will reduce the interest rate by as much as 0.50% even if the cosigner does not have a better credit score, since having two people responsible for repaying the loan instead of just one reduces the risk that the loan will become delinquent or go into default.
Who can be a Cosigner?
A cosigner can be anybody who satisfies the lender’s credit criteria. Most often the cosigner is a parent, but it can also be another relative, such as a grandparent, aunt, uncle, older sibling or spouse. The cosigner does not need to be related to the borrower, so long as the cosigner is willing to obligate himself or herself to repay the loan.
Risks of Cosigning a Loan
Some parents do not understand that a cosigner is not just enabling the student to qualify for the loan or to get a loan with a better interest rate. A cosigner is a co-borrower, just as responsible for repaying the loan as the student borrower. The borrower and cosigner are jointly and severally responsible for repaying the debt, meaning that each is fully responsible for repaying the debt. If the student is late with a payment or defaults on the loan, it damages the credit history of both the borrower and cosigner. Usually, if the borrower is late with a payment, the lender will start seeking monthly payments from the cosigner.
Cosigners sometimes learn about the consequences of cosigning a loan when they themselves try to qualify for a new loan or a refinance of an existing loan, such as refinancing a mortgage. When the lender evaluates the cosigner’s credit report, the student loan might cause the new consumer loan to be denied or yield a higher interest rate. The cosigner argues that the student loan “really” isn’t the cosigner’s loan. But, from the lender’s perspective, it is the cosigner’s loan, since the cosigner could be required to repay the borrowed funds.
Cosigning a loan gives the borrower the ability to damage the cosigner’s credit history. A cosigner should cosign a loan only if the cosigner trusts the borrower to act responsibly and believes that the borrower will repay the loan. The cosigner should also only cosign a loan if the cosigner is capable of repaying the loan entirely on his or her own, without any help from the borrower. Low-income individuals, such as grandparents on fixed income, should be especially wary of cosigning a loan.
Boyfriends and girlfriends should not cosign each other’s loans, as emotions may make it difficult for the cosigner to rationally consider the risks of cosigning. Family members should ask themselves if they’d be willing to cosign the loan if the borrower were a complete stranger. Cosigning a loan can lead to strained family relationships if the borrower is unable or unwilling to repay the debt.
Cosigners should read the promissory note carefully before signing it. In some cases the promissory note authorizes more than just the current student loan. The cosigner may be agreeing to cosign all subsequent loans for the same period of enrollment.
A cosigner’s obligation to repay a student loan is almost impossible to discharge in bankruptcy, the same as the borrower’s obligation to repay the debt. Unless the cosigner can prove undue hardship in an adversarial (legal) proceeding, a very harsh standard, the cosigner will remain responsible for repaying the cosigned loans.
It may be difficult to remove the cosigner’s obligation to repay the debt. For example, consider a situation in which a borrower gets divorced after his or her spouse cosigns the borrower’s student loan. Even if the borrower agrees to assume all responsibility for repaying the loan as part of the divorce decree, the lender will still report delinquencies and defaults on the credit histories of both the borrower and cosigner. The lender could even get a wage garnishment order against the cosigner if the borrower defaults on the loan. The divorce decree has no impact on the cosigner’s agreement to repay the debt, since that is an agreement between the cosigner and the lender, not an agreement between husband and wife.
Some lenders offer cosigner release as an option, if the borrower makes 12, 24, 36 or 48 consecutive payments on time (before the due date). All payments must be made on time; a single late payment is sufficient to disqualify a borrower for the cosigner release option. The borrower must also satisfy credit criteria at the time he or she applies for cosigner release. These credit criteria may include having a steady job, earning enough money to be able to afford to repay the debt, having satisfactory debt-to-income ratios, and performance on other credit obligations, not just having an excellent credit score.
Borrowers often report difficulty qualifying for cosigner release. The CFPB has reported that less than 10% of borrowers who apply for cosigner release (less than 1% of all borrowers) succeed in obtaining a cosigner release. Lenders want to be certain that the borrower was making the monthly loan payments and is capable of continuing to make the monthly loan payments. Lenders are aware that the cosigner may be helping the borrower with the loan payments. The lender may be concerned that the cosigner will stop helping the borrower after the cosigner release is approved, causing the borrower to eventually default on the loan. Some lenders even track whether the loan payments were made by the borrower or the cosigner and will not approve a cosigner release if any payments were made by the cosigner.
To increase the chances that a borrower will qualify for cosigner release:
- All payments should be made by the borrower, not the cosigner.
- The borrower must be capable of making and continuing to make the loan payments. For example, the borrower should have a stable job with sufficient income to make the loan payments. Lenders may use debt-to-income ratios and debt-service-to-income ratios to evaluate whether the borrower can afford to make the loan payments.
- All payments must be made in full and on time, by the due date, not afterward. While some lenders provide a grace period after the due date, where late payments will not be reported as a delinquency to the credit bureaus, the criteria for cosigner release are stricter. A single late payment is enough for the borrower to lose eligibility for cosigner release, even if it is just a few days late. To ensure that the payments are received by the due date, borrowers should mail the checks at least a week before the due date. Borrowers can also reduce the likelihood of a late payment by signing up for auto-debit, where the monthly payments are made automatically from the borrower’s bank account.
- The borrower must have a very good credit score. This means the borrower must make on-time payments on all debts, not just the student loans. There is no tolerance for any delinquencies.
There are two main alternatives to a formal cosigner release option. One is to pay off the debt in full. The other is to use a non-cosigned loan to refinance the cosigned loan, such as a private consolidation loan, home equity loan or personal bank loan.
Other Protections for Cosigners
It may be a good idea for the cosigner to have a signed and notarized agreement with the borrower, where the borrower agrees to reimburse the cosigner for any payments made by the cosigner on the cosigned loan. This helps demonstrate that the cosigned loan is not a gift.
If the borrower dies and the loan does not include a death discharge, the cosigner will be responsible for repaying the debt. It may be advisable for the cosigner to get a term life insurance policy on the borrower with a face value equal to the loan balance and a term equal to the repayment term of the loan.
Cosigning Federal Student Loans
Direct Subsidized and Unsubsidized Loans, Perkins Loans, and Direct Consolidation Loans do not require cosigners. A cosigner is not required on these federal student loans even if the student is underage, as the defense of infancy does not apply to federal student loans.
The Grad PLUS Loan and the Parent PLUS Loan do not require cosigners, so long as the borrower does not have an adverse credit history. However, if the borrower has an adverse credit history, he or she may still be able to obtain a PLUS Loan by obtaining a cosigner who does not have an adverse credit history. The cosigner on a PLUS Loan is called an endorser.
The endorser on a Parent PLUS Loan cannot be the undergraduate student on whose behalf the parent is borrowing.
Cosigner Requirements for Student Credit Cards
A cosigner may be required for credit cards, not just private student loans. The Credit CARD Act of 2009 requires students under age 21 to have a cosigner to get a credit card, unless the student has an independent means of repaying the credit card debt.