PRIVATE STUDENT LOANS
Oftentimes students will take advantage of help from someone who has a longer or stronger credit history in order to qualify for a student loan or student loan refinance. That other person cosigns the loan application, so that the lender will consider their credit and income as well as yours. There are many benefits to using this strategy if you know someone who is who is willing to cosign your student loan. Here are some of the most frequently asked questions about cosigning student loans, with some simple answers.
The main reason to use a cosigner is if your own credit history or financial strength is not sufficient to qualify you to take out a student loan by yourself. When you have a cosigner, the lender will typically combine your finances and credit with that of the cosigner. Applying with a cosigner that has a strong enough financial profile may increase your chances of being approved despite your own lack of credit or income.
But there is another benefit of having a cosigner. That’s when combining their financial history and strength with yours makes your loan application so strong that you secure a lower interest rate. Why is a lower interest rate so valuable? Over the lifetime of a loan the money you save by paying less interest can add up to thousands or even tens of thousands of dollars.
The most common scenario is for a parent to cosign for their child’s private student loan when there is a financial gap between the cost of attendance and federal aid received. Oftentimes other relatives will also help a recent graduate who wants to refinance or consolidate student loans in order to save money or make the monthly payments more manageable. A parent or guardian, relative such a grandparent, or even your spouse may be a potential cosigner for a student loan. But your cosigner doesn’t even need to be a relative. Anyone who is willing and able to cosign can do so if they wish.
Financial eligibility is the key. That means that the cosigner needs to have good enough credit and a strong enough financial profile to qualify for the loan. They will be filling out a loan application, in other words. So whether the loan is approved or not will depend on how well they meet the borrowing standards of the specific lender who is going to fund the loan.
If you just graduated, for example, and are still building your career and your earning power, you may benefit from a cosigner so you can refinance into a more affordable student loan. Later, as your own financial profile grows and becomes stronger, you may be able to have the cosigner removed so that only you are the borrower on your loan. That will give you more financial independence and relieve the cosigner of any future responsibility or liability for repaying your loan.
If you have a spouse who has significantly better credit, less debt, or higher income than you do, you may want to consider using them as your cosigner. That’s especially helpful if you both already like to share your financial resources since over the long haul a strategic student loan refinance may save a lot of money. As a couple you could even set aside whatever is saved to set up a tuition account for your own children.
Anyone who is a cosigner on a loan can be held legally and financially responsible for the repayment of that loan. If you fail to repay your loan, for instance, that could create serious problems for your cosigner and do harm to their credit score and profile as well. Despite the fact that being a cosigner carries such weighty responsibility, many people still do it. You may be surprised to know, that according to data from the federal Consumer Financial Protection Bureau approximately 90% of all private student loans involve a cosigner.
That depends on your lender’s policies, but many lenders do offer the option to have the cosigner released after a certain period of time. They will first want to see that the loan has been repaid as agreed, on time, every month, for an extended period of time. To understand if a cosigner release is available with your loan or student loan refinance review your loan agreement and discuss it with your particular lender. Releasing your cosigner frees them up from any legal or financial connection to the loan, and it can enable you to start building your own credit profile in a more substantial way.
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