Private Student Loans: Understanding the Role of a Cosigner
If you're a college student needing a private student loan, you might need a cosigner. This isn't because of bad credit, but because you might not have enough credit history yet. Parents, guardians, relatives, or other trusted people can help you qualify for a loan or get a lower interest rate.
What is a Cosigner?
A cosigner is someone who agrees to share the responsibility for your loan. This helps you qualify for the loan or get a better rate since most students do not have the credit history lenders require for private student loans.
How Does Cosigning a Loan Work?
- Compare Rates: Start by comparing rates from multiple lenders and understand the required credit scores for each rate.
- Pre-qualify: You and potential cosigners can pre-qualify to see the rates offered based on your credit scores.
- Apply: Complete the loan application and provide contact info for your cosigner(s).
- Submit Documents: Cosigners complete their part of the application and submit any required documentation. The lender will verify this information and calculate the interest rate.
- Loan Offer: You will receive a loan offer with the rate and repayment terms. Cosigners are informed of the rate at this time.
- Accept Terms: Agree to the loan terms and complete any necessary forms before the funds are sent to your school. Cosigners will receive a copy of the required disclosures.
- Repayment: Depending on the terms, payments may start right away or be deferred until after you finish school.
Cosigner Responsibilities
Cosigners share the responsibility of repaying the loan. Their credit will be affected if payments are missed or if the loan goes into default. This responsibility remains even if:
- The borrower (you) manages repayment of the loan responsibly.
- The borrower doesn’t graduate or can’t get a job that pays enough.
- The cosigner's financial situation changes due to retirement, job loss, etc.
When Does Cosigning End?
Most cosigners are responsible until the loan is fully repaid. However, some lenders offer cosigner release options if the borrower meets certain criteria. The Arkansas Student Loan Authority has a cosigner release option. Borrowers can release their cosigners from their responsibility after 48 consecutive monthly principal and interest payments are received on time. At the time the release is requested, the student borrower must meet the same credit and underwriting criteria the cosigner possessed at the time of the loan application. Additionally, some lenders forgive the loan if the student borrower dies or becomes permanently disabled.
Credit Impact
When you cosign, the lender will do a hard credit inquiry, which can temporarily lower your credit score. Late payments or defaults will negatively affect your credit, but on-time payments can improve it.
Risks of Cosigning
Cosigning comes with risks. If the primary borrower (you) or another cosigner fails to make payments, the responsibility falls on the cosigner. This debt may also impact the cosigner’s ability to get future loans.
Minimizing Loan Debt
To reduce loan debt:
- Choose a career path with a sufficient return on your college investment.
- Understand the total cost of college and how much can be paid without loans.
- Maintain good academic performance and manage living expenses.
- Apply for scholarships and work during college if possible.
- Choose cost-effective housing and save on daily expenses.
Choosing the Best Lender
When picking a lender:
- Compare interest rates, fees, and repayment options.
- Choose a lender you trust and who won't push you towards unnecessary financial products.
The
Arkansas Student Loan Authority is a state agency offering lower-rate loans and free educational resources to Arkansas students and families. They focus on providing the best rates based on the cosigner's credit score and have a variety of loan options and repayment plans.
Understanding the role of a cosigner in obtaining a private student loan is crucial for students and their families. A cosigner can significantly impact the loan approval process and the interest rates offered, making higher education more accessible. However, it is essential to recognize the responsibilities and risks involved in cosigning, including the potential impact on credit and financial obligations. By carefully evaluating loan options, maintaining clear communication, and considering long-term financial goals, students and cosigners can navigate the complexities of private student loans more effectively. Taking these steps ensures that both parties are well-prepared to manage the loan and contribute to the student's academic and financial success.