Cosigners are like pinch hitters in baseball—if a borrower's credit history falls a bit short of a lender’s criteria, a cosigner can go to bat for the primary borrower and help secure a loan. Family members and friends willing to be cosigners for private student loans play an especially vital role in helping students with little to no credit history or income supplement educational costs once they exhaust federal financial aid.
Cosigners can also help students establish their credit history and potentially qualify for a lower interest rate, while also solidifying their own credit score. On top of helping someone you care about, cosigning for a new student loan may be an opportunity to diversify the types of accounts on your credit. A variety of credit types have the potential to improve your score, so adding an installment account like student loans could work in your favor.
Still, there’s a lot to consider before agreeing to a serious financial agreement like a student loan. It’s important that cosigners have a high degree of confidence and trust in the student’s ability to finish their education and pay back the student loan, since a cosigner becomes responsible for payments should the primary borrower default. If you’ve done the research and are ready to help a student with a loan, take a look at what’s generally expected from cosigners to help prepare for the application.
Meeting the basic requirements
You don’t have to be financially flawless to be a cosigner, but most lenders will look for these basic requirements:
- Age: Cosigners generally need to be 18 or older.
- Income: Verify your income by providing employer information, pay stubs, bank statements, and/or other financial documents as part of the application.
- Proof of Citizenship or Permanent Resident Status: This can be a Social Security Number or a US resident document.
- Credit History: The lender will need to run a credit check on the cosigner to review credit history.
- Monthly Obligations: Rent, mortgage, or car payments will be part of how lenders evaluate a cosigner’s debt-to-income ratio (if needed).
Signs of a strong cosigner
A cosigner should demonstrate a stronger financial history than the primary borrower. The stronger a cosigner looks to a lender, the greater the potential for a lower interest rate. In addition, demonstrating a healthy debt-to-income ratio will also be a factor as the lender evaluates the cosigner’s ability to make payments.
Once you’ve submitted your cosigner application and all the requested documents to the lender, the process is relatively quick and straightforward. Your first step is completing a shortened loan application, which will include your latest paystubs to demonstrate your income. Next, authorize a hard credit inquiry. Once the underwriting team decides you’re a good fit, you’re nearly done. The primary borrower finalizes his or her application, you both sign for the loan, and you’re good to go!
There’s no doubt a cosigner can be a lifesaver on a student’s educational journey. If you’re ready to sign on the dotted line, remember that establishing clear communication and expectations with the primary borrower about how the loan will be used, repayment plans, payment progress, and what to do if financial hardship arises will keep everyone’s solid credit and relationship intact. Finally, creating a timeline in regards to plans to release a cosigner will lay a solid foundation for the future so everyone can rest easy knowing the generous act of cosigning is being met with the thoughtfulness and consideration it deserves.
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