Do You Need Someone to Cosign for Student Loans?
Navigating student loans? Discover when a cosigner is necessary, their role, and paths to release for both parties.
Securing funds for higher education often involves navigating various loan options. A common consideration is whether a cosigner will be necessary. Understanding a cosigner’s role clarifies eligibility and financial obligations. The need for a cosigner depends on the loan type and the borrower’s financial standing. This guide explains when and why a cosigner might be required.
Federal vs. Private Student Loans and Cosigner Requirements
Student loans fall into two categories: federal and private, each with distinct cosigner requirements. Federal student loans, provided by the U.S. Department of Education, generally offer flexible terms and do not require a credit check or a cosigner for most applicants. Direct Subsidized and Unsubsidized Loans are available to eligible students without considering their credit history. These loans are a primary source of funding due to their accessibility and borrower protections.
Federal PLUS loans, including Direct PLUS Loans for graduate students and Parent PLUS Loans for parents, are an exception. These loans involve a credit check. If the borrower has an “adverse credit history,” they may need an endorser, similar to a cosigner. Adverse credit is defined by the Department of Education to include being 90 or more days delinquent on $2,085 or more in debt, or having a bankruptcy or foreclosure in the past five years.
Private student loans are offered by banks, credit unions, and other financial institutions. Their approval process almost always includes a credit check. Because many students have limited or no established credit history, a cosigner is frequently required. Over 90% of private student loans for undergraduate students are cosigned. A cosigner’s creditworthiness can improve approval chances and lead to more favorable loan terms, such as a lower interest rate.
When a Cosigner Becomes Necessary
A cosigner becomes necessary for private student loans when the primary borrower does not meet the lender’s financial criteria. Lenders assess several factors to determine a borrower’s ability to repay. Students often lack a sufficient credit history, as many have not built a record of borrowing and repaying debt. This absence makes it difficult for lenders to evaluate the student’s risk.
A borrower’s credit score is a significant factor in private loan applications. Lenders look for a minimum credit score, often 620 to 650, for approval without a cosigner. Many private lenders prefer scores of 670 or higher. Some require a cosigner to have a score of at least 670 or 720 to improve approval odds. A higher credit score for either the borrower or a cosigner can lead to better interest rates, resulting in substantial savings.
Lenders evaluate the borrower’s income and debt-to-income (DTI) ratio to determine repayment capacity. Many students have limited or no income while attending school, so they often do not meet income requirements. The DTI ratio calculates monthly debt payments as a percentage of gross monthly income. Lenders prefer this ratio to be 36% or less, though some accept up to 43%.
A cosigner with stable income and a favorable DTI ratio can satisfy these requirements, indicating a stronger ability to repay. A lack of significant personal assets might also influence a lender’s decision, making a cosigner’s financial standing more important.
Responsibilities and Risks for Cosigners and Borrowers
Once a private student loan is secured with a cosigner, both the borrower and cosigner assume significant legal and financial responsibilities. A cosigner is equally responsible for loan repayment if the primary borrower fails to make payments. Lenders can pursue either party for the full amount due, treating them as jointly liable.
The loan’s payment history appears on the credit reports of both the borrower and cosigner. On-time payments positively contribute to both parties’ credit scores, helping build or maintain a good credit profile. Missed or late payments negatively affect the credit scores of both. This shared credit impact emphasizes consistent and timely payments.
Loan default carries severe consequences for both individuals. If the loan goes into default, typically after several missed payments, both the borrower’s and cosigner’s credit scores will be damaged. Lenders may engage collection agencies, pursue wage garnishment, or offset tax refunds to recover the debt. Lenders may also initiate lawsuits against both to collect the outstanding balance. Open communication between the borrower and cosigner regarding repayment status is important to manage these shared risks.
Cosigner Release Provisions
Some private lenders offer cosigner release, which allows the cosigner to be removed from the loan obligation under specific conditions. This feature provides a pathway for the cosigner to no longer be legally responsible for the debt, transferring full responsibility to the primary borrower. Not all private lenders offer this option, and terms vary considerably.
To qualify for cosigner release, the primary borrower must meet several requirements. A common condition is making a specific number of consecutive, on-time payments, ranging from 12 to 48 months. The borrower must also demonstrate they can meet the lender’s credit criteria independently, often requiring a strong credit score (750 or more) and sufficient income. The loan must remain in good standing, with no history of delinquency, deferment, or forbearance.
The application process for cosigner release is initiated by the borrower, who undergoes a credit check and income verification by the lender. Even if a borrower meets the outlined criteria, approval is not guaranteed. Less than 10% of applicants may qualify due to strict requirements.