Co-signing a loan is probably one of the most confusing aspects of private student loan borrowing. However, unlike federal student loans issued by the government, private student loans are given based on income and credit worthiness. Most students need help to qualify.
Before you decide to co-sign for a private student loan, read these facts:
1. Co-signers are equally responsible.
When you co-sign you are co-owner of the loan--just like if you purchased a vehicle with someone else and both signed onto the car loan. The loan will be reported on the co-signer’s and the primary borrower’s credit reports. Never co-sign an education loan that you couldn’t repay, in case the student isn’t able to repay upon graduation.
2. Loan amounts are approved based on the cosigner’s income.
You don’t want to be approved for money you can’t afford. One of the benefits to private loans as opposed to federal PLUS loans is that approval is based partly on the co-signer’s income. You don’t want to be approved to borrow $100,000 when you make $30,000 per year. With a federal student loan, you could be approved for this amount, but that doesn’t mean you should borrow the full amount offered. It’s similar to when you qualify for a $400,000 house but only really want to spend $200,000. Borrow within your means.
3. Under certain conditions, co-signers can be removed.
It’s scary to see the Consumer Financial Protection Bureau report that 90 percent of co-signer release requests are denied. However, this doesn’t mean qualified applicants for co-signer release weren’t able to be removed from private student loans. As the borrower, you can take over the loan if you have the credit and income to qualify for it solely. If the goal is co-signer release, borrow within the limits that would be approved based on your expected first- or second-year expected income. Career services can help you figure out this number based on your major and experience.
4. On tax returns, only the primary borrower can deduct the interest.
The exception to the rule of co-signers being equal borrowers is the student loan interest tax deduction. Only the primary borrower can claim this interest when filing taxes. The deduction can net a $625 refund or a reduction in a federal income tax bill. As long as that’s the person who’s making the payments, it’s fantastic. If the co-signer is making the payments, have that person talk to the borrower about maybe contributing this amount to paying off the student loan. It’s an easy way for borrowers who can’t afford payments to contribute.