A student loan co-signer is a person who takes full responsibility for a student loan with the primary borrower. If the primary borrower doesn’t make payments, the lender will seek payment from the cosigner. The cosigner is necessary to get the loan because they typically have a favorable credit score, stable credit history, or solid income, one or more of which the borrower may lack.
While having a cosigner is great for the borrower, it's often not beneficial for you. Many risks come with cosigning a loan. If you've been asked to be one yourself, it's important to understand a cosigner's rights and responsibilities before signing the promissory note.
What is a student loan cosigner?
A student loan cosigner is someone who agrees to guarantee a student loan debt borrowed by someone else but does not receive any of the loan proceeds. Basically, they help the loan applicant get a student loan the student couldn't get on their own because they lack good credit. Not only does having a cosigner help the borrower qualify for a loan, but also the cosigner may help the borrower get a lower interest rate and better repayment terms.
Typically, the only benefit a cosigner gets is the positive feelings of helping a family member, loved one, or friend get the money they need to pay for their education. However, the consequence of cosigning a student loan is that private lenders will hold you fully responsible for repaying the debt when monthly payments are missed.
How do I know if I cosigned a student loan?
If you’re unsure whether you’ve cosigned a student loan, there are a few ways to find out if you cosigned a loan.
- Contact the student loan servicer and ask if they have you listed as a cosigner.
- Check your credit report for student loans. If you didn't take the student loans out for your education, you might have cosigned a loan. Contact the private lender or servicer listed to find out who borrowed the loan.
- Check the Federal Student Aid website, studentaid.gov. That website will list all federal student loans you borrowed for yourself, Parent Plus Loans you borrowed for a child, and any Graduate Plus Loans you may have endorsed (cosigned) for a student with an adverse credit history.
Many private student loans require someone to cosign the loan. Federal student loans typically don't require a cosigner.
Student Loan Cosigner Rights
The rights of a cosigner on a student loan are controlled by the loan agreement the lender provided. The loan agreement will tell you the circumstances under which you can get a cosigner release. Typically, before you can get released from the loan, the borrower must make several consecutive monthly payments, pass a credit check, and show sufficient income and a suitable debt-to-income ratio.
For instance, Sallie Mae allows a borrower to request a cosigner release if the borrower shows proof:
- they graduated or completed the certificate program
- they have sufficient income
- they are a U.S. citizen or permanent residence
- they are current on all Sallie Mae-serviced loans over the past 12 months
- they have not received a hardship forbearance or modified repayment plan and
- they have made 12 on-time principal and interest payments on each loan they request a cosigner release.
The cosigner may also have the right to request deferment, forbearance, and alternative repayment options to avoid missed payments or late fees. However, the servicer may require the primary borrower to request those options.
What are a cosigner's rights for a student loan when the primary borrower doesn't pay? If the borrower stops making on-time payments and eventually defaults, the cosigner has the right to sue the borrower to collect the money they (the cosigner) have paid towards the student loan. You can read more about when a cosigner can sue a student loan borrower here.
Student Loan Cosigner: Pros and Cons
Pros of cosigning a student loan:
- The student can access more loan money. Private lenders generally require positive credit history, sufficient income, and a reasonable debt-to-income ratio. Many college students lack one or all of these things, and federal financial aid may not be enough to pay for their education. As a result, a cosigner with good credit can help the student qualify for loans needed to complete their degree program.
- The student may get a lower interest rate. Adding your creditworthiness to the loan application may qualify the student for a lower interest rate, which will decrease the overall cost of the loan.
- The student will build their credit. As the borrower makes on-time loan payments, they'll build a positive credit history, which can help them build a good credit score. Hopefully, their credit score and income improve to the point that you meet the eligibility requirements for a cosigner release.
Cons of cosigning a student loan:
- Your debt-to-income ratio will increase. If you're thinking about buying a home, cosigning a student loan will negatively impact your DTI ratio by increasing your debt obligations.
- You're on the hook for the loan. Not only will your credit score take a hit for each late payment, but miss enough payments, and both you and the primary borrower can be sued. If a judgment is entered against you, the lender may be able to garnish your wages, garnish your bank account, and place a lien on your home.
- Your relationship can deteriorate. Falling behind on student loan payments can put a strain on the personal finances of both you and your cosigner. They'll want you to refinance or get a cosigner release so your failure to pay won't affect them, but you may not be able to do either of those things. At some point, resentment may set in, and your relationship may never be the same.
Cosigned a student loan? Let's talk
Bottom line: When the borrower refuses to pay a student loan you've cosigned, it can leave you feeling helpless — especially when the loan amount is in the tens of thousands of dollars. That's why it's important to evaluate loan options before you cosign.
After you've cosigned a loan, your focus needs to be on how to get off the loan, either a cosigner release, refinancing/applying for a consolidation loan, or negotiating a student loan settlement.
If you'd like help going over your options, schedule a free 10-minute call with me today.