In order to get approved for some student loans, some borrowers may choose to apply with a cosigner — a creditworthy individual who will be legally responsible for repayment should you default, become disabled or die.
While there is no credit check or requirement to add a cosigner for most student federal student loans, students applying for private loans may consider adding a cosigner to their application. Applying for a student loan with a cosigner can help strengthen the overall application and as a result, may help a borrower get approved for a loan they otherwise wouldn’t have or could help the borrower secure a more competitive interest rate than they would have alone.
But adding a cosigner is a serious decision, for both the borrower and the potential cosigner. That’s because both the cosigner and primary borrower are both equally on the hook for the loan. Read on for some cosigner mistakes to avoid.
Related: What’s the average student loan interest rate?
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Understanding the Role of a Cosigner
A cosigner is someone who signs onto a loan with a primary borrower, and in doing so, takes full responsibility for the loan. This means that if the primary borrower is unable to make payments on the loan, the cosigner is responsible for stepping in. The loan will appear on the cosigner’s credit report and if there are any missed or late payments, the cosigner’s credit score can also be impacted.
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Pros and Cons of Cosigning on a Student Loan
There are benefits and downsides to having a cosigner on a student loan.
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Pros of a Cosigner
If a student isn’t approved when applying for a student loan without a cosigner, the major pro of adding a cosigner to a student loan application is that the borrower becomes a more favorable candidate for the loan.
Additionally, adding a cosigner can help boost the creditworthiness of the application, allowing the student borrower to secure a more competitive interest rate or more favorable terms on their loan.
If the student is approved for the loan with a cosigner, this can help the student borrower build their own credit history as they make on-time payments on the loan.
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Cons of a Cosigner
The cosigner’s debt-to-income ratio can be impacted by cosigning on a student loan. This could potentially impact the cosigner’s ability to borrow down the line, depending on their overall financial situation.
Additionally, because the cosigner is equally responsible for repaying the loan, if the primary borrower have any issues repaying the loan this could lead to serious implications for the cosigner, including:
- The cosigner is responsible for making payments if the primary borrower cannot.
- The cosigner’s credit report and credit score could be negatively impacted.
- And having a cosigner on a student loan can potentially add stress or strain to the relationship should anything go wrong during the repayment process.
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Mistakes to Avoid When Adding or Removing a Cosigner
Borrowing a private student loan with a cosigner is common. According to the Measure One Private Student Loan Report published in December 2021, during the 2021-2022 school year, 92.16% of newly originated private student loans borrowed by undergraduate students had a cosigner. But, before you jump in, make sure you understand the ins and outs of choosing — and removing — a student loan cosigner.
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1. Ignoring Your Income and Cash Flow
When you apply for a private student loan or refinance, lenders check your financial fitness (credit score, debt-to-income ratio, etc.) to see if you qualify.
Some lenders will review a borrower’s income as part of their eligibility requirements and may also consider something called “free cash” flow — the amount of money you have left at the end of each month after subtracting taxes and cost of living expenses.
If the lender feels you lack the necessary free cash flow to repay your loan, either your application will be declined or your loan will be approved at a less-than-desirable interest rate.
If your cash flow is more of a trickle, the lender may prompt you to add a cosigner to your application.
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2. Going for Romance
When considering the best cosigner, steer clear of asking your boyfriend or girlfriend. If the relationship goes south after signing, your ex will still be legally responsible for the loan. Would you want to be on the hook for the student loan payments of someone you’re no longer dating?
Instead of focusing on a romantic connection, it may make sense to consider family members. Though anyone can cosign a loan for you, a relative is generally a more reliable choice than a friend. Typically, a cosigner is a parent or guardian, spouse or other family relative.
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3. Going in Blind
A family member may think cosigning a loan is as simple as signing his or her name on a contract, but it’s more complicated than that. A cosigner is a coborrower, which means the debt will show up on your credit report and on his or hers.
Plus, if you can’t make good on your loan for any reason, the lender has the legal right to pursue your cosigner for repayment.
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4. Failing to Set Expectations
It may be unpleasant, but it’s important to discuss worst-case scenarios with your cosigner. If you lose your job and can’t make payments, your cosigner must be prepared to assume full responsibility for the loan. Plus, you’ll need to discuss whether you’ll repay that person should he or she have to make payments at some point or if those payments will be gifts.
Note: Once you set clear expectations, it’s a good idea to sign a legal agreement together. Depending on your relationship, the agreement can be as simple as an email or as formal as a document drafted by a lawyer.
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5. Expecting a Handout
If you think a legal agreement sounds drastic, keep in mind that a friendly cosigning situation can go sour when you don’t hold up your end of the deal. As mentioned, if the primary borrower fails to make payments on their loan, the cosigner is equally responsible. That means they’re responsible for repaying the loan if the borrower cannot, their credit score can also be impacted by late payments, and should the loan go into default, collections agencies can try to collect from the cosigner as well.
Word to the wise: Don’t make your cosigner regret doing you the favor. The fact is, your cosigner is taking a risk for you. You should feel confident in your ability to repay the loan fully on your own.
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6. Not Understanding How to Remove a Cosigner
When you start conversations with a potential cosigner understand the options for removing them down the line. Some lenders may offer an official cosigner release option. This means filing an application with the lender to remove the cosigner from the loan. If the lender doesn’t offer cosigner release, it may be possible to refinance the loan and remove the cosigner.
Not all lenders offer a cosigner release option — and those that do have stipulations for removal. Typically, you’ll need to make anywhere from 12 to 48 months of on-time, consecutive payments to qualify for cosigner release.
The lender will also look at your overall financial situation, including how well you’ve managed other debts, and may require that you submit supporting documentation such as a W-2 or recent pay stubs.
Understanding your lenders requirements for cosigner release and ensure you are establishing strong financial habits like making monthly payments on time, and are effectively budgeting and saving, could potentially improve your chances of being approved for a cosigner release.
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7. Not Realizing Refinancing May Still Be an Option
In the event you aren’t successful in removing your cosigner via cosigner release, another potential option is refinancing the loan. When you refinance a loan, you take out a new loan (sometimes with a new lender), that has new terms. Doing this can allow you to potentially remove your cosigner, so long as you are able to meet the lender’s eligibility requirement on your own.
While refinancing can be an option to consider for some borrowers, it won’t make sense for everyone. When federal loans are refinanced, they are no longer eligible for any federal protections or programs.
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The Takeaway
Adding a cosigner to your student loan can truly work to your advantage, potentially helping you qualify for a more competitive interest rate on a student loan or a refinance. So if someone in your life has offered to cosign, consider it seriously — just make sure you both understand what you’re signing up for from the start.
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