Private student loans are credit based. That means not only do they require an acceptable credit rating but, in many cases, the better the rating … the lower the interest rate.
It’s important to realize, though, that cosigning a loan or asking someone to cosign one for you, makes another person just as accountable to repay that loan as the borrower.
This section will help you decide when it is to your advantage to consider a cosigner, provide a brief overview of cosigner rights and responsibilities, and direct you (or your parents) to the next step in cosigning a loan.
When to Consider a Cosigner
There are two instances in which a creditworthy cosigner is helpful:
- If you do not have an established credit history and are applying for a credit-based private loan applying with a cosigner may help you get approved.
- Even if you have an established credit history, many private loans have a “tiered” interest rate structure in which those with excellent credit can enjoy superior terms.
As a result, if your cosigner has excellent credit (and you do not), you are likely to benefit from a loan with lower rates and fees.
This table shows you how much interest would be paid—based on different loan rates—on a $10,000 loan taken out your freshman year.
You take out a $10,000 loan: |
Interest
Rate |
Capitalized
Interest |
Total Interest
Paid |
8% |
$3,267 |
$12,821.55 |
10% |
$4,083 |
$17,241.43 |
12% |
$4,900 |
$22,186.89 |
Having a cosigner could save you a lot of money.
Cosigner Rights and Responsibilities
A cosigner is guaranteeing the debt. That means you (or your parents or spouse, if they are the cosigners) will have to repay the loan if the borrower does not. It’s critical that you understand and want to accept this responsibility and that you are aware of the following:
- Be sure you can afford to repay the loan. If you’re asked to pay and you cannot, you may be subject to collections efforts and your credit rating could be damaged.
- Even if you’re not asked to repay the debt, your liability for it may be included in computing your debt-to-income ratio and may prevent you from getting approval for other loans.
- Under federal law, creditors are required to give you a notice that explains your obligations as a cosigner. In addition, make sure you get copies of all important papers, such as the loan contract and the Truth-in-Lending Disclosure Statement.
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