What it means to lend a hand as a co-signer
What characteristics to look for in a co-signer
Most students can not qualify for a private student loan without a creditworthy co-signer because traditional aged college students do not have much of a credit history for a lender to review. For direct student loans, the federal government pseudo insures the Direct Loans themselves if a student does not repay a student loan. For private student loans, they want to look at historic economic indicators that a loan applicant can repay.
Co-signers should have a positive, robust credit history.
This means that they co-signer has successfully made on-time payments on other forms of credit like a home, car, or credit cards. Also, good co-signers generally have low income-to-debt ratios. That is that money they are taking in is a lot more than is going out to pay creditors.
Consider a relative.
According to the Consumer Financial Protection Bureau (CFPB) and the Department of Education, more than 90 percent of private student loans were co-signed by a parent or grandparent. But what about the ten percent. We know from anecdotal evidence from schools that the next largest group of co-signers may be grandparents or another relative.
Why do so many go to a relative? First, you’ve known these people for your entire life. Typically, this means it is easier to communicate to them in the hard and the easy times. Second, they have your back. A co-signer is required to make a payment when the primary borrower does not. Relatives are much more likely to kick in that payment in the hard times. Third, they will know where you end up. Usually, students keep their relatives aware of where they live and how to get in touch with them.
Approaching a friend to co-sign.
So what do you do if there is no one in your family who is creditworthy to sign on a student loan? First, reconsider whether or not you need a private student loan. Can you reduce other costs so that you don’t have to borrow these funds? Second, reflect on the people who have been in your life for a long time and that you feel comfortable having hard conversations with. You want to make certain you will keep in touch with your co-signer for the life of the loan. If you are borrowing as a first-year student and have a 10-year repayment schedule, this could be almost 15 years of a financial tie to this person. You want to make certain if you are facing some sort of economic hardship, that you can reach out to them to ask for help to keep the loans in good standing for you and their credit scores sake. Third, discuss the loan terms upfront and determine the merits of looking for a private student loan with a co-signer release.
Remember there may be co-signer release.
There are a number of private student loan products that offer to release the co-signer from the loan promissory note terms if the student borrower has paid on-time for 48 payments or more. Ensure that you know the eligibility for obtaining a co-signer release as well as not understanding why they had been denied. There are some lenders that may not permit co-signer release if a borrower prepays on their student loan so make certain you read the fine print so that you and your co-signer are aware.
Colleen MacDonald Krumwiede is a financial aid expert with over a decade of financial aid experience at Stanford GSB, Caltech, and Pomona College and another decade at educational finance and technology companies servicing higher education. She guides go-to-market strategy and product development at Pay4 to transform the way families afford college.