After being awarded all of your scholarships and financial aid, you might still fall short of the cost of college or graduate school. Before worrying too much about how you can make up the difference, remember that there are private loans available to take care of whatever is not covered by your financial aid package.
One unique feature of many private student loans is that they may recommend or require a creditworthy cosigner be added to your loan application. That's because many students understandably have little to no credit history when applying for college or graduate school.
While you might be a bit worried about asking someone to cosign a loan for you, the practice is standard and can lead to a number of benefits beyond simply qualifying for a loan. We've outlined what a cosigner is and why having a cosigner may benefit you in the long run.
What is a cosigner?
A cosigner is usually a parent or a legal guardian who commits to making the payments on a student's loan in the event that you, the student, cannot. You and your cosigner both share responsibility for the loan.
Basically, if you were to stop making payments on your loan, the lender would expect your cosigner to continue making payments on your behalf. Late payments can have a negative impact not only on your own credit report, but also your cosigner's.
There are benefits to having a cosigner for a private loan, even if you have a sparkling credit history. A cosigner with a strong credit history of their own can not only help you qualify for a private loan you might otherwise not be approved for yourself, but can help lower your interest rate, saving you money.
In fact, according to a study by Credible, an undergrad with a cosigner has an interest rate that's more than two percent lower, and a grad student has an interest rate 1.62 percent lower with a cosigner.
That means that a student taking out a $15,000 private loan with a 10-year term and a 7% fixed interest rate would end up paying $5,899.53 in interest alone over the life of loan. With a cosigner who would reduce the interest rate by 2%, a student with the same loan and same term would end up paying $4,091.71 in interest. If you were the student in this example, you'd save $1,807.73. That's more than 10% of the original loan you took out!
Why do you need a cosigner?
You might be wondering why you need a cosigner in the first place. Having one for a private loan isn't a bad thing, though. In fact, there are a lot of benefits, even if you have strong credit history.
When a private lender decides whether or not to approve you for a loan, they take a close look at your credit history to determine the likelihood of you repaying the loan. Your credit history is listed in detail on your credit report, which shows any derogatory marks, such as late payments or loan defaults.
As a student, you may have had past difficulty with paying bills, like a credit card or car loan, which is reflected on your credit report. A cosigner can be helpful to qualify you for a loan you might not otherwise be able to get on your own, or lower the interest rate you'd get.
Who can be a cosigner?
Parents, siblings, aunts and uncles, or grandparents are usually the cosigners on private student loans, but you can choose anyone you'd like to cosign your loan, so long as they fulfill the requirements of your lender. Generally, most lenders require cosigners to have a solid and stable income and a good credit score.
Having a cosigner not only helps you get approved for a private loan, it also helps you to establish or grow your credit. By working in unison with your cosigner and maintaining communication to ensure you don't miss payments or make late payments, your credit will continually improve and open up future opportunities for you in the later stages of your college education and beyond.
What is a cosigner's commitment?
The responsibility of repaying your loan is shared between you and your cosigner. This means that any missed or late payments will negatively impact not only your credit, but also your cosigner's.
If you miss a payment, the lender will expect your cosigner to continue making payments. Similarly, if you default on the loan, the cosigner will be held responsible for paying off the remainder.
College or graduate school can be tough on your financial situation, and everyone runs into a patch of hardship now and again. If you know your loan payment is due soon and you think you might be unable to make a payment, let your cosigner know ahead of time and see if they'll be able to foot the bill for the month.
Cosigners at CommonBond
At CommonBond, your cosigner will go through a quick and simple underwriting process that requires just a few document uploads, such as a recent paystub, to serve as proof of income. There are just four requirements of cosigners at CommonBond:
- Be a U.S. citizen or permanent resident.
- Passed the age of 21.
- Verification of income.
- Met CommonBond's current underwriting criteria at the time of release, which includes a review of credit history.
Once the loan is disbursed and you start receiving your bill, your cosigner will have access to your borrower account to check on the status of your payments. This will facilitate communication between you and your cosigner and help each of you to stay on top of the payments.
We encourage you to partner with your cosigner in creating a plan that will help you make your payments on time and build your credit. Figure out what works best for the two of you if something were to happen that hurt your ability to continue making payments. We also recommend you take some time to learn what other options you have in case you're unable to make payments, such as applying for forbearance.
A cosigner isn't necessarily beholden to the loan for its entire term. Many lenders allow the cosigner to be released from the loan after certain milestones are met. These requirements are laid out in a cosigner release policy that your lender may have provided to you upon approval of the loan.
While some lenders have as many as 10 requirements before you can release your cosigner from a loan, CommonBond has only four simple requirements.
To meet the four requirements to release a cosigner at CommonBond, the borrower must have:
- Graduated from the degree program that their student loan was associated with.
- Passed the age of 21.
- Made 24 consecutive, on-time monthly payments of the loan's principal and interest.
- Met CommonBond's current underwriting criteria at the time of release, which includes a new review of the applicant's credit.
When you feel you're in a stable position where you can take on the responsibility of your loan yourself, it may be time to consider requesting the release of your cosigner. Before doing so, consult your lender's cosigner release policy to make sure you meet all of its requirements and be sure to show your appreciation to your cosigner for the help they've given you throughout the years.
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