If you're considering a private student loan you may be wondering: "Do I need a cosigner?" The answer is probably: yes.
Why is that? Because most college students don't have an adequate credit history to qualify on their own. In fact, 92% of private student loans are cosigned (according to figures from the MeasureOne Private Student Loan Report, Dec. 2019).
Let’s discuss what a cosigner is and why you might need a cosigner for your student loans.
What is a cosigner?
If you’ve already been rejected for a student loan, it’s wise to consider reapplying with a cosigner.
A cosigner can be a parent, guardian, grandparent, relative, or any adult with an established credit history. In fact, Sallie Mae reports that 30% of applicants for their SmartOption loan apply with cosigners other than a parent.
Cosigners agree to be responsible for the loan if the borrower is unable or unwilling to pay. In the lender’s view, a cosigner is a coborrower and is fully responsible for the loan if the primary borrower defaults.
If it sounds serious, that's because it is. It’s extremely important to ensure that you are only taking out loans you’ll be able to repay. (You can use our free NitroScore tool to help crunch the numbers. Be sure to hit “refine my score” to take into account all of your information.)
Does everyone need a cosigner?
Even if you can get a student loan without a cosigner, it may still be wise to apply with one. Banks will base your interest rates on the higher credit score, which usually is the cosigner's.
But even if the cosigner has a lower credit score than you do, your student loan is still likely to come with a lower interest rate it there’s a cosigner. That’s because the bank will be taking on less risk if there are two borrowers who can potentially repay the loan, instead of just one.
Is the cosigner's credit affected?
If you’re going to ask someone to cosign a student loan, it’s important to know what you’re asking for. The cosigner takes on a certain amount of personal risk, and their credit score will be impacted even if you pay the loan on time.
The most obvious risk is that if you default on your loans, the cosigner will be on the hook for repayment. That’s why it’s so critical to find a loan that makes sense for both your and your cosigner’s financial situations.
The loan will also show up on the cosigner’s credit report, meaning their credit rating can go down if the loan goes into default. In addition, the cosigned loan could be counted in the cosigner's debt-to-income ratio if they later need to apply for a mortgage, personal loan, or other form of credit.
Many lenders allow a cosigner to be released from a loan after the primary borrower has established their own credit and made a certain number of on-time payments. This allows cosigners to be completely relieved of their obligations to repay the loan. However, it's important to check the terms of the cosigner release before you take out the loan — there's no guarantee that your cosigner will be able to be released.
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Jon is a writer and marketer for Nitro who is passionate about bringing transparency to the student loan process along with providing families with the information needed to make smart financial decisions. He also just recently refinanced his student loans allowing him to pay them off 5 years faster all while saving an additional $152/month. As he continues to pay them off himself, he strives to help others do the same. Jon also has a long history of connecting people with educational opportunities to help them improve their careers and their overall personal finances. In his free time you can find him reading travel blogs and researching destinations around the world in search of his next adventure. Read more by Jon O'Donnell