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Should Parents Cosign Private Student Loans?

Ben Luthi

If your child is a college student and has exhausted their federal financial aid but still has some expenses left to cover, private student loans can help them bridge the gap. But unlike federal student loans, private loan eligibility and interest rates are based on the borrower’s creditworthiness and income, which can make it difficult for students to qualify without a cosigner.

As a parent, you can cosign your child’s private loans, which could increase their chances of approval. But here’s the catch – you’ll be responsible for paying back the debt if your child can’t.

So should parents cosign student loans? What are the potential consequences and alternatives? Here’s what you need to know.

Why do most private student loans need a cosigner?

Because private student loans have minimum requirements for credit scores and income, it can be difficult for college students to qualify on their own, particularly if they’re undergraduate students.

This is because most college students haven’t yet had the chance to establish a credit history. Even if they have, their history is probably very limited and may not provide enough information for lenders to predict how likely they are to repay the debt.

Then, there is also the income consideration. Just 40% of college undergraduates had a job in 2020, according to the National Center for Education Statistics. The majority of those were part-time employees, which means that most students likely don’t earn enough to meet the minimum income requirements set by private student loan companies. Because students are often unable to work full-time while going to school, most private student lenders allow students to apply with a qualified cosigner. In these cases, the cosigner’s income and credit history may help the primary borrower get approved.

What does it mean to cosign a student loan?

Being a cosigner for your child’s private student loan means that you agree to pay back the loan if they fail to keep up with the monthly payments. Depending on which repayment plan you and your child decide works best, you’ll either start making small payments towards interest right away or you’ll choose a deferment option, meaning no payment will be due until your child graduates, leaves school for other reasons, or falls below half-time enrollment.

When you cosign the loan application, the lender is likely to include your credit history, income, and assets in their decision-making process. As a result, you have the chance help improve your child’s odds of getting approved and could help them secure a lower interest rate even if they qualify on their own.

But because you’re equally responsible for the debt, nonpayment could damage your credit score. Even having the loan on your credit report could impact your ability to get approved for other loans in the future. Lenders often include your cosigned loans as part of your own personal debt when reviewing your credit profile. But they’re are some advantages to cosigning…

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Advantages of cosigning

The primary advantage of you choosing to be a private student loan cosigner is that it can help your child in a few different ways:

     It may improve their approval odds: Simply put, most private student loan borrowers require a private student loan cosigner and your creditworthiness could be the deciding factor in the lender’s decision . Even if your child could qualify on their own, cosigning may also help them qualify for better rates. If your child has exhausted their other education financing options, a private student loan can help keep their education plan on track.

     They remain the primary borrower:  While the loan will appear on your credit report and you’re equally responsible for ensuring repayment, cosigning may be an alternative to taking out parent loans solely in your own name. And because your child remains the primary borrower…

     It can help them build their credit: One of the primary reasons your child may need a cosigner is a lack of credit history. By helping your child qualify for a private student loan, you’re giving them the opportunity to build their own credit profile – something that is likely to be important in the near future.

     You may be able to drop from the loan in the future: Many private student loan companies offer cosigner release programs that allow you to be removed from the loan. These programs typically require a consistent repayment history from your child, so you’ll want to make sure they never miss a payment. Alternatively, your child may be able to refinance the debt into their name once they graduate and can qualify for that on their own.

Risks of cosigning

While there are some reasons to consider becoming a private student loan cosigner, there are some risks that you should understand:

     It can impact your future creditworthiness: As a cosigner, the loan will appear on your credit report just as it will on your child’s report. Lenders will consider that debt and its monthly payment, which can impact your debt-to-income ratio, when you apply for credit. Depending on your situation, this could make it more difficult for you to get credit when you need it.

     It can temporarily lower your credit score: As with most applications for credit that involve a hard credit pull, applying to become a private student loan cosigner is likely to result in a small, temporary dip in your credit score. This small dip may or may not affect your creditworthiness if you plan on applying for other credit immediately after cosigning, but as long as your child keeps up with their payments, your score should recover fairly quickly.

     Nonpayment can damage your credit: If your child misses payments on the loan and doesn’t tell you, it can damage your credit score significantly.

     It can affect your financial plan: If your child can’t afford to take on payments after graduation, they won’t get the same income-driven repayment plans and generous forbearance and deferment options as they’d get with federal student loans. This means that you may need to take over. If so, those loan payments could impact your progress toward retirement and other financial goals and obligations.

How to be removed as a cosigner

Often (but not always), one of the benefits of being a private student loan cosigner is that you may eventually be able to be removed from loan. There are a couple of ways this can happen.

Cosigner release programs

Cosigner release programs are available with some private student lenders, but not all. With these programs, your child must typically make a certain number of consecutive, on-time monthly payments — the requirement can range from 12 to 48 months, depending on the lender.

This means that any missed payments or  short forbearance or deferment period would likely restart the number of consecutive months

Once your child completes the required number of consecutive payments, they must submit for another credit evaluation. If their income and credit history have improved to the point where the lender feels comfortable removing you from the loan, the cosigner release request may be approved.

It’s important to note that getting approval for cosigner release can be difficult and consecutive on-time payments are usually only one of several requirements. Make sure your child has made the effort to improve their credit and financial situation before applying for release. As a reminder, if you’re banking on a future cosigner release, make sure you know the release requirements before taking out the loan.

Have the child refinance the loan in their name

If your child’s lender doesn’t offer cosigner release, or they have a long repayment requirement to get approved, your child may opt instead to refinance the student loan solely in their name. If this is your plan, just remember student loan refinancing also involves an application process and credit review.

Depending on the situation, refinancing the loan can have more benefits than one. In addition to removing your responsibility for the debt, your child may also be able to secure a lower interest rate, a different repayment plan, or other features that they don’t have with their current lender.

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Alternatives to cosigning

If you’re not certain that being a private student loan cosigner is the right move for you, there are some other options to consider.

Exhaust other financial aid options

Make sure that your child fills out the Federal Application for Federal Student Aid (FAFSA) each year. As long as they’re a dependent student, they’ll need to include some of your financial information, so provide that for them promptly to avoid missing the deadline.

The FAFSA will determine your child’s eligibility for federal student aid, such as grants, work-study, and federal student loans. On top of that, encourage your child to seek out scholarships and grants from other sources. They can start with their university, which may offer both needs- and merit-based scholarships.

In addition to university-based scholarships, you can also encourage your child to take advantage of resources like Purefy’s list of top scholarships and grants

Apply for Parent PLUS Loans or private parent loans

If you want to help your child without saddling them with student loan debt while they’re in school, you may opt to apply for federal Parent PLUS Loans or private parent loans.

Just keep in mind that Parent PLUS Loans often have higher interest rates than other federal financing methods, and have limited options for income-driven repayment. And while you can request to defer payments until after your child leaves school, that’s not automatic. Some private lenders won’t even allow you to defer payments, but they may also offer lower rates than the federal alternative.

If you want to pursue a federal Parent PLUS Loan or private parent loan but eventually transfer the debt to your child, some private student lenders offer that option when you refinance the loan.

Have your child apply for a private student loan without a cosigner

Some lenders, including Ascent, offer private student loans without a cosigner requirement. Instead, your child may be able to rely on their own income and credit history, or they can obtain an outcomes-based loan, which is for juniors and seniors and focuses on the employment rate and average salary for graduates in their program.

Income-share agreements are another option for some college students. With this, a company or college may offer to fund your student’s education in exchange for a percentage of  their earnings for a set period after they graduate. The terms of these programs can vary, though, so they’ll want to compare all their options before settling on one.

Bottom line: Should parents cosign student loans?

If you’re thinking about cosigning a private student loan for your child, it’s crucial that you take the time to understand how it might impact you and your finances, and what other options are available for your child. If you’ve determined that your child needs a private student loan to supplement any other financing or aid they’ve received, your presence as a cosigner could be the decision-maker in their approval.

If you do decide to become a private student loan cosigner, it’s important to help your child shop around and compare offers from multiple lenders before applying. You can compare interest rates and other features with Purefy to get an idea of what’s available and which lender can offer you the best terms for you.

You can even schedule a free consultation and receive expert advice based on your situation, as well as guidance through the private student loan process.

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Earnest Rate Disclosure

Rates displayed include the 0.25% Auto Pay discount. You can take advantage of the Auto Pay interest rate reduction by setting up and maintaining active and automatic ACH withdrawal of your loan payment from a checking or savings account. The interest rate reduction for Auto Pay will be available only while your loan is enrolled in Auto Pay. Interest rate incentives for utilizing Auto Pay may not be combined with certain private student loan repayment programs that also offer an interest rate reduction. For multi-party loans, only one party may enroll in Auto Pay. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Actual rate and available repayment terms will vary based on your income. Fixed rates range from 4.24% APR to 13.03% APR (excludes 0.25% Auto Pay discount). Variable rates range from 3.83% APR to 12.53% APR (excludes 0.25% Auto Pay discount). Earnest variable interest rate student loans are based on a publicly available index, the 30-day Average Secured Overnight Financing Rate (SOFR) published by the Federal Reserve Bank of New York. The variable rate is based on the rate published on the 25th day, or the next business day, of the preceding calendar month, rounded to the nearest hundredth of a percent. The rate will not increase more than once per month. Although the rate will vary after you are approved, it will never exceed 36% (the maximum allowable for this loan). Please note, Earnest Private Student Loans are not available in Nevada. Our lowest rates are only available for our most credit qualified borrowers and contain our .25% auto pay discount from a checking or savings account. It is important to note that the 0.25% Auto Pay discount is not available while loan payments are deferred.

Nine-month grace period is not available for borrowers who choose our Principal and Interest Repayment plan while in school.

Earnest clients may skip one payment every 12 months. Your first request to skip a payment can be made once you’ve made at least 6 months of consecutive on-time payments, and your loan is in good standing. The interest accrued during the skipped month will result in an increase in your remaining minimum payment. The final payoff date on your loan will be extended by the length of the skipped payment periods. Please be aware that a skipped payment does count toward the forbearance limits. Please note that skipping a payment is not guaranteed and is at Earnest’s discretion. Your monthly payment and total loan cost may increase as a result of postponing your payment and extending your term.

Loan Eligibility criteria: Eligible students must: 1) For college Freshmen, Sophomores and Juniors, attend, or be enrolled to attend, a Title IV school full-time. For college Seniors and Graduate students, attend, or be enrolled to attend, a Title IV school at least half-time; and 2) be pursuing a Bachelor’s or Graduate degree. Earnest private student loans are subject to credit qualification, completion of a loan application, verification of application information, self-certification of loan amount, and school certification.

Responsible borrowing tip: Explore all scholarship, grant and federal options before applying for a private loan.

Earnest Private Student Loans are made by One American Bank, Member FDIC. One American Bank, 515 S. Minnesota Ave, Sioux Falls, SD 57104.

Earnest loans are serviced by Earnest Operations LLC, 535 Mission St., Suite 1663 San Francisco, CA 94105, NMLS #1204917, with support From Navient Solutions, LLC (NMLS #212430). One American Bank and Earnest LLC and its subsidiaries, including Earnest Operations LLC, are not sponsored by agencies of the United States of America.

ELFI Rate Disclosure

Education Loan Finance is a nationwide student loan provider offered by Tennessee based SouthEast Bank. ELFI is designed to assist students financially with receiving their education. Subject to credit approval. See Terms & Conditions. Interest rates current as of 10-24-2022. Variable interest rates may increase after closing but will never exceed 18.00%. Interest rates may also differ from the rates shown above. The term of your loan, financial history, and other factors, including your cosigner’s (if any) financial history can affect the interest rate. For example, a 10-year loan with a fixed rate of 7% would have 120 payments of $11.61 per $1,000 borrowed. Rates are subject to change.

College Ave Rate Disclosure

College Ave Student Loans products are made available through Firstrust Bank, member FDIC, First Citizens Community Bank, member FDIC, or M.Y. Safra Bank, FSB, member FDIC.. All loans are subject to individual approval and adherence to underwriting guidelines. Program restrictions, other terms, and conditions apply.
Rates shown include autopay discount. The 0.25% auto-pay interest rate reduction applies as long as a valid bank account is designated for required monthly payments. Variable rates may increase after consummation.
Minimum loan amount $1,000, as certified by your school and less any other financial aid you might receive.
This informational repayment example uses typical loan terms for a freshman borrower who selects the Deferred Repayment Option with a 10-year repayment term, has a $10,000 loan that is disbursed in one disbursement and a 8.35% fixed Annual Percentage Rate (“APR”): 120 monthly payments of $179.18 while in the repayment period, for a total amount of payments of $21,501.54. Loans will never have a full principal and interest monthly payment of less than $50. Your actual rates and repayment terms may vary.
Information advertised valid as of 11/17/2022. Variable interest rates may increase after consummation. Approved interest rate will depend on the creditworthiness of the applicant(s), lowest advertised rates only available to the most creditworthy applicants and require selection of full principal and interest payments with the shortest available loan term.

Ascent Rate Disclosure

Ascent Student Loans are funded by Bank of Lake Mills, Member FDIC. Loan products may not be available in certain jurisdictions. Certain restrictions, limitations; and terms and conditions may apply. For Ascent Terms and Conditions please visit: www.AscentStudentLoans.com/Ts&Cs.

Rates are effective as of 11/14/2022 and reflect an automatic payment discount of either 0.25% (for credit-based loans) OR 1.00% (for undergraduate outcomes-based loans). Automatic Payment Discount is available if the borrower is enrolled in automatic payments from their personal checking account and the amount is successfully withdrawn from the authorized back account each month. For Ascent rates and repayment examples please visit: www.AscentStudentLoans.com/Rates.

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