When college-bound students start crunching the numbers, most come to the same conclusion—an education doesn't come cheap. Private student loans are a viable way to pay for college, but a solid credit history and steady source of income go hand in hand with getting approved. The problem is, many students are short on all three.
This is generally where a cosigner comes in. They're so common, according to MeasureOne research, that cosigners were attached to over 92 percent of undergraduate private student loans during the 2017-18 school year; 62 percent for private graduate loans.
If you fall into this camp, and graduation is in the rearview mirror, what's the next step? Let's dig into the important things students and co-signers need to know after college comes to an end.
How Cosigning Works
A cosigner (a.k.a. the person who teams up with the borrower when applying for the loan) gives the lender a little peace of mind. They're essentially agreeing to step in and take over the payments if the student, for whatever reason, is unable to make good on their loan. It's a simple process—the application itself is comparable to those involved when seeking other forms of financing. One other encouraging tidbit: that same MeasureOne research we mentioned above also found that over 97 percent of private student loans are indeed in good standing.
Cosigning for a family member or loved one can be life-changing for the borrower, who might otherwise be ineligible. A cosigner can also help them lock down a lower interest rate, ultimately saving the student a significant amount of money over the long haul. In some cases, this can translate to thousands of dollars in savings. A 10-year, $50,000 student loan at 6 percent interest means paying $16,612 in total interest over the life of the loan. But if getting a cosigner helps bring that rate down to, say, 4 percent, the borrower will end up saving over $5,865 in interest payments.
Another perk is that the cosigner doesn't have to stick around forever. For example, for CommonBond loans, once the borrower has made on-time payments for 24 straight months (36 for a refinance loan), the cosigner can actually be released from the loan altogether. This is a great way to help the student build financial independence and improve their credit score at the same time. If their career and income feel stable, it's an option that may be worth exploring.
What to Do After Graduation
Make a plan for repayment: It all begins with getting organized! Make sure you know all your outstanding balances, interest rates, and monthly payments. Most loans come with grace periods, which provide a little buffer—typically expiring six months after graduation—during which you don't have to make payments on your loan. (You can actually refinance during the grace period and save big by locking down a lower interest rate; more on refinancing in a bit.)
Most loans are automatically set with a 10-year repayment plan, but this isn't set in stone. Opting for a higher monthly payment will actually help you eliminate the balance faster and keep more money in your pocket over the long term. Let's say that you have a 4.5 percent, $20,000 student loan balance. Assuming a $207 monthly payment, it'll take you 10 years to pay it off. But if you up your payment to $278 a month, you'll pay it off three years sooner and also pay $1,521 less in interest.
Consider refinancing: Thanks to rising interest rates, now is the best time to refinance a student loan. While the cosigner themselves can't refinance on the borrower's behalf, they can cosign again on a refinance loan, though this isn't always necessary. If the borrower has graduated, is employed or has an offer letter, and has a solid credit score, they may not even need a cosigner to refinance. The bottom line is this: the sooner you lower your interest rates, the sooner you can start reaping the savings. Knowledge is power here—it can also help borrowers keep more of their hard-earned cash and potentially eliminate the need for a cosigner.
Cosigning gives students the borrowing power they need to pay for college, which is no small thing. Entering the workforce with a college degree is vital in today's economy. What's more, as students begin repaying their loans, their credit histories and scores should improve.
Want to learn more about refinancing? Get more information about CommonBond's refinancing options here.