Learn the pros and cons of co-signing a student loan.
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By Michelle Black, Bankrate
It's not uncommon for college-bound students to use student loans to help pay for their education. In fact, it's the norm. According to the Institute for College Access & Success, around 70 percent of college graduates leave school owing student loan debt. However, not all of those students can qualify for financing on their own.
Depending on the borrowing choices you make, you may or may not need a co-signer to secure financing for college. This guide will help you discover the general types of student loans available, when you may need to ask a co-signer for help and the pros and cons of having a co-signer on your student loan.
Types of student loans
If you need to borrow money to pay for college, you have two options: federal student loans or private student loans. Whether or not you need a co-signer will largely depend on which type of loan you choose.
Federal student loans
The
U.S. Department of Education issues federal student loans. To apply for
these government-backed loans, you will need to fill out a Free
Application for Federal Student Aid, or FAFSA. If you're a dependent on
your parents' tax return, they will need to supply their information as
well.
Based on the financial information you supply when you fill
out your FAFSA, you may be eligible for one or more of the following
federal student loans.
- Direct Subsidized Loans: Your school decides how much you can borrow based on your level of financial need. The U.S. Department of Education pays interest on your loan while you're in school (half time or more), during the six-month grace period after you leave school and during deferment periods.
- Direct Unsubsidized Loans: These loans are available to undergraduate and graduate students without financial need. Your school still determines your loan amount by examining the cost of tuition and fees minus your other financial aid sources. Interest will accrue on your loan at all times once you accept the funds.
- Direct PLUS Loans: Graduate students and parents of undergraduates may be eligible for these loans (grad PLUS loans and parent PLUS loans, respectively). Borrowers may borrow up to the full cost of school attendance minus other financial aid sources.
It's important to note that even though your school
determines how much you can borrow, yearly and overall loan limits may
come into play. These loan limits can range between $3,500 and $12,500
annually for undergraduates, depending on your year of study and whether
you're a dependent or independent student.
Do you need a co-signer for federal student loans?
The
good news is that it's rare to need a co-signer when taking out federal
student loans. Most federal student loans don't even require a credit
check, meaning you are likely eligible even if you have little credit
history or damaged credit.
Private student loans
Private
student loans, unlike their federal counterparts, are issued by banks,
credit unions and online lenders. As a result of the many borrowing
options available, you can find private student loans offered with a
variety of loan amounts, interest rates and repayment terms.
Instead
of filling out a FAFSA, you apply for private student loans by
submitting a loan application. Some lenders offer a prequalification
process, which gives you a conditional interest rate quote up front with
only a soft credit inquiry.
A lender will consider several factors when you apply for a private student loan, such as:
- Credit history.
- Credit score.
- Income and employment history.
These
factors help lenders determine whether you are a good credit risk. If
you do qualify for a loan, this information will also influence your
rate and how much you can borrow.
Do you need a co-signer for private student loans?
Most
college-aged borrowers don't have a lengthy credit history established.
As full-time students, they often have income limitations as well.
Neither of these are positive from the point of view of a lender.
It's quite common for young borrowers to need a co-signer when applying for private student loans. In fact, 96 percent of the undergraduate student loans issued by College Ave, a popular student loan lender, are co-signed.
Exceptions to the rule
Although
most federal student loans don't require co-signers, there is an
exception to the rule. If you're applying for a Direct PLUS student loan
(for graduate students or parents), you may need an endorser to qualify
if you don't have good credit. An endorser, similar to a co-signer,
agrees to repay the loan in the event of late payments or default.
There
are also caveats with private student loans. Private lenders commonly
require co-signers, but some lenders may release co-signers from student
loans once the primary borrower can meet certain requirements (e.g.,
creditworthiness, a certain number of on-time payments, etc.).
Unfortunately, getting a co-signer release can be tricky. A Consumer Financial Protection Bureau report from 2015 revealed that 90 percent of private student loan borrowers who applied for a co-signer release were denied.
Pros and cons of co-signing a loan
When
you're thinking about borrowing money for any reason - student loans or
otherwise - it's always a good idea to consider the pros and cons. The
same is true if you're debating whether to apply for a loan alone or to
ask a loved one to co-sign for the account.
Pros
- A co-signer might help you secure a student loan when your personal credit or income isn't strong enough to qualify on your own.
- You might qualify for a better interest rate if you have a co-signer with good credit and sufficient income to satisfy a lender.
- If a co-signer helps you qualify for a student loan and you manage the account well (on-time payments, etc.), it could help you build better credit for the future.
Cons
- A co-signer is equally liable for student loan debt, as much as if they were the sole borrower.
- Late payments or defaults on joint student loans could damage your credit scores and the credit scores of your co-signer.
- Even if you pay the loan on time, the amount of debt could make it difficult for your co-borrower to secure additional financing in the future.
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