Everyone dreams of an excellent education that will open doors for their future.
Every student dreams of that Perfect course to get his dream job.
However, the biggest hurdle? The cost! Majority of the students’ problem is the funding for their education.
Many students take out loans, federal or private, to fund their education.
Though there are many federal loans offered, there are more takers than what is offered.
This results in many students opting for a private educational loan. Sometimes, it is a mix of both federal student loan and private student loan.
Do You Have To Have A Cosigner For A student Loan?
A cosigner can not only increase your chances of getting a loan but can also help in reducing the interest rates. You don’t require always require a cosigner. Please refer to the table below to know if you require a cosigner.
|Your Current Status||Requirement For A Cosigner|
|US citizen with little or no credit history||Cosigner required|
|US citizen with bad credit score or default payments||Cosigner required|
|US citizen with good credit score||Cosigner not required|
|Foreign student with little or no credit history||Cosigner required|
|Foreign student with bad credit score or default payments||Cosigner required|
|Foreign student with good credit score and sufficient credit history||Cosigner required|
Where To Find A Cosigner?
Finding a cosigner for a student loan is not really difficult but it isn’t very easy either. Usually it is a parent or a family member who agrees to cosign your student loan. Though it is mostly parents, there are other family members too, who will cosign your student loan.
However, if you are an international student, your cosigner will have to be a US citizen or at least a permanent resident. If you have family or extended family living in the US, you can ask them. If you have no family, you can even ask a friend or anyone else to be your cosigner. If someone is willing to cosign your loan, they can be a cosigner, immaterial of how they are related to you.
Your cosigner should have a sufficient credit score and other requirements by the lender. A cosigner must be aware of his responsibilities and should be ready to pay up the loan or penalties, if you default on your payments.
What Does You Cosigner Require?
Though it is the parent in most of the cases, others can also cosign a student loan. Here are a few things to consider when you find a credible cosigner:
What Are The Advantages Of Having A cosigner?
When you are a student struggling to finance your education, you hardly have the time and resources to build a good credit history. A good credit score and history is what decides your eligibility to qualify for a loan. When the credit score is low, you won’t find any lenders. If you do get a loan, it will be at a very high interest rate and will have many additional terms and conditions.
If you have a cosigner, the banks and other lending institutions will be more relaxed with the terms and conditions. This is because, the lender is guaranteed of his money and is not at a risk. Having a cosigner will help you get easy approvals for the loan you want and the rate of interest charged can also be bargained.
Are You Cosigning A Student Loan?
The cosigner for educational loans should be aware of the following before signing:
What Are The Responsibilities Of A Cosigner On A Loan?
When a student takes out a loan, both the student and cosigner are responsible. As a cosigner you have the following responsibilities:
What Happens When The Student Doesn’t Make The Scheduled Payment?
Not every can make the timely payments on their student loans. Many struggle to get the right job after finishing their education. Even if one gets their dream job, not everyone gets paid well enough to handle all their financial commitments. In such cases, the borrower defaults a payment.
Now, if you have cosigned the loan and the borrower doesn’t make the scheduled payment, you will be held responsible too. Though it is the borrower who benefits from the loan and tax exemptions, the cosigner has to share the liabilities. If the borrower defaults a payment, both the borrower and the cosigner may have to pay the penalties. This varies from lender to lender. The late fees will increase the overall loan cost.
If the borrower is unable to repay the loan due to a variety of reasons, the cosigner will have to repay the entire principle and all the interest accumulated, including the late fees. If the late payments are reported to the consumer reporting agencies, the cosigner’s credit score will also be negatively impacted.
So, defaulting on a student loan will not only affect the financial life of the borrower, but will have a negative impact on the cosigner’s financials as well.
What Can You Do If The Borrower Defaults?
Ok, so now that the borrower has defaulted the loan payment or is not in a position to repay the loan. Yes you are responsible for the loan and have to repay it. But there are a few options for you as well.
Get A Forbearance
If your child or family member you have cosigned a student loan for, has defaulted the payment, you can always apply for forbearance. Forbearance will give you a temporary relief from the loan payment as the loan term can be extended.
Get A New Loan
You can apply for a new loan and pay off this debt with that money. This loan can either be taken out in your name or the borrower’s name. If it is taken in the borrower’s name, it will release you of all the financial responsibilities towards the student loan. Now it is up to the borrower to repay this new loan. This is a good option if the borrower has built a good credit score but is still not sufficient for the student loan lender.
If you are taking a new loan, it is generally done under the assumption that the borrower will be able to repay the money to you in the near future. There are many debt consolidation companies that will offer you new loans to pay off the existing loans.
Get A Refinance
One can also try negotiating with the lender and change the terms of the loan. Though this is neither easy nor common, one can always try. If the cosigner or the borrower have worked with the lender or have a good relationship with the lending entity, you can try renegotiating.
One can either try to increase the term of the loan, reduce the interest rates or even try to settle for a smaller monthly payments. This will give the cosigner some relief financially and more time to pay off the debt.
A cosigner can also refinance on their own, without involving the borrower. This means the cosigner is now taking full responsibility of the loan. However, if the cosigner wants to only reduce the monthly payments, they can try to refinance the entire loan themselves.
Now, the borrower can send the payments to the cosigner and not the lender. This way, even if the borrower falls short on couple of payments, no defaults will be recorded and no credit score will get affected.
What Is A Cosigner Release?
When you cosign a loan, you are tied up with the financial responsibility along with the borrower, until the loan is repaid in full. However, many lenders have the option of a cosigner release. This enables the cosigner to cede all responsibilities connected with the loan.
How Can You Get Out Of A Cosigned Loan?
Here is how a cosigner can get a release from the loan commitments:
Request By The Student
The student has to make an official request to the lender for a cosigner release. The student is the one who is directly responsible and they have to take the initiative.
The student should explain as to why the cosigner should be released. If the student is in a good financial position and doesn’t require a cosigner anymore for a guarantee of repayment, he can state that too, to the lender.
The borrower will have to submit information like current employment, income information, financial reports and credit reports. These will back up the borrower’s claim that they are financially stable enough to make the loan payments without a cosigner.
Once the borrower has sent all the details and forms, it now time to wait. The lender will analyse the statements and look into the credit scores of the borrower before approving a cosigner release. The rate of approval is very low because, usually the borrower rushes into this step. If the borrower has not been financially stable for a considerable amount of time, the lender will not approve the request.
Try Again Later
If the request for a cosigner release has been rejected by the lender, the borrower has to try again after sometime. The borrower should focus on building up his credit history further and make timely payments on all his financial debts. Some lenders offer a release if the borrower makes a specified number of timely payments. Once the required number of payments is made, the borrower can try again for a cosigner release.
Cosigning a loan is never a good option for the cosigner. It not only adds financial responsibility but will also affect the credit score of the person. However, when it is your own child or family member, you will have to cosign. Helping a student get the right education need not be a mistake with the above options.