The following is a contribution from Nate Matherson of LendEDU
For parents all across the country, back to college or into college season is coming up fast. With decision day and spring term behind us, there are just a few months of sun before college students head back to campus. The rising cost of college has made financial aid a necessity for the vast majority of college students. Included, federal student loans are used by many students to help afford the cost of higher education.
However, for many families, financial aid and federal student loans aren’t quite enough. The next option for students and families is to use private student loans as a way to finance an education. Private student loans should always be used as a last resort, but the reality is that many college students need private funding at some point during the four (or five!) years in order to get to the finish line.
Did you know that 90% of private student loans are cosigned?
According to our research, we found that 90% students who were approved for a private student loan had the help of a cosigner. A cosigner, most often a parent but sometimes a guardian or grandparent, agrees to apply with and then take mutual responsibility for the private student loan. In short, the parent uses their credit history and income in order to get the student approved for the loan. The reality is that only a small fraction of college students have enough income and the credit history required to get approved on their own.
Fortunately, my parents were able to cosign on my loans through Sallie Mae. I wouldn’t have made it to graduation without their help, and I really appreciate the financial risks they took for me. And fortunately for them, I never made a late payment and I was actually able to get them released as a cosigner from the loan when I refinanced after graduation.
Whew, that was a long intro, but this is an important topic. Here are the four things you need to know before you cosign a student loan this year!
#1 – Your Credit and Income Will Impact Rates & Terms
Did you know that not all cosigners are equal?
During the approval and origination process private student loan companies look to evaluate a cosigner on an individual basis. Much like applying for a mortgage or for an installment loan, the rates and terms offered on a private student loan are determined by creditworthiness and income. However, it is the cosigner’s creditworthiness and income which primarily determine the rate and terms that the student (the primary borrower) receives.
At the time of this writing, private student loan rates range from as low as 4.74% to as high 13.99%. Cosigners with a high credit score and high income may be able to provide the primary borrower (the student) with a much lower rate, vs. a cosigner with a moderate credit score and moderate income.
It is also worth mentioning that some smaller startups have started offering student loans without a cosigner. Companies like Funding University, Ascent, and Sixup among others specialize in this type of student loan. This might be an alternative option to consider, however, the approval process and terms are somewhat ambiguous from lender to lender.
#2 – There Are Risks for Cosigners
Did you know that cosigners are equally responsible for repayment?
If the student misses a payment, whether in-school or after graduation, the cosigner’s credit will be negatively impacted. In short, both the primary borrower and the cosigner are responsible for making payments on the loan. Cosigners should stay in communication with the primary borrower to make sure that payments are being made on time.
As the cosigner, you need to have an upfront conversation with the primary borrower about the importance of on-time payments not only for themselves but for yourself.
#3 – Some Companies Offer Cosigner Release
Did you know that some private student loan companies offer cosigner release?
The following lenders offer cosigner release:
– College Ave (24 months)
– Sallie Mae (after 24 months)
– Wells Fargo (after 24 months)
– SunTrust (after 36 months)
– PNC (after 48 months
Sometimes it is as simple as just asking. And for parents who are currently cosigned, you should regroup with the student after graduation and talk about the steps to take to meet cosigner release requirements. Remember, without release cosigners are on the hook for about 10 years, and release could make all the difference in just a year or two.
The CFPB put together these sample letters for you to use.
#4 – Refinancing Is Another Way Out
Did you know that you can refinance student loan debt like you would a mortgage or an auto loan?
I refinanced my student loans about a year after graduation. In short, I was able to lower my rate dramatically from over 9% to under 6%. The interest savings are great, but importantly I was also able to release my parents as cosigners.
When you apply for student loan refinancing, depending on the company, you will have the option to apply solo or with a cosigner. I decided to apply solo. Fortunately, after a year of steady income and on-time payments I met the requirements for refinancing without a cosigner. This was a big deal for me and my family.
In short, the refinancing company paid off my old student loans and issued a new student loan without my parents included.
After graduation, families should have a conversation about refinancing and if possible work to remove the cosigner from the loan.
I hope that this article was helpful for both primary borrowers (students) and well as the cosigners (parents)! I am excited to answer any follow-up questions about this topic in the comments below!