Information taken from: Simple Tuition
Tips on Co-Signing a Private Student Loan
It is very difficult for students to be approved for a private student loan on their own. As such, if you are a student borrower, without an established credit history and a current, steady income:
- You WILL need a co-signer for a private student loan.
- Your co-signer must have "good" to "excellent" credit and an income.
Due to the current credit crunch, it will be harder than ever to be approved for a
private student loan this year. Lenders are making their credit criteria stricter
than in years past. For almost all students, a credit-worthy co-signer will be a REQUIREMENT
to be approved for a private student loan.
These tips provide you with advice on what to look for in a co-signer and how to make your case that co-signing a loan with you is a good risk to take.
Selecting a co-signer
Selecting a co-signer can be a challenge. It is not a casual decision to agree to co-sign a private student loan. The co-signer is hitching their wagon to you for 20 years (or more). They will be required to make loan payments if you fail to do so. Their credit could be damaged if you do not repay the loan on time. These risks may make a potential co-signer think twice about the commitment.
Not just any person will do as a co-signer. You have to find a willing co-signer who has a solid credit history and income they can document.
The ideal co-signer candidate must
- Be willing to help you out in a long-term financial commitment.
- Have good or excellent credit, reflected in a strong credit score (roughly 675 or higher).
- Have adequate income they can document demonstrating that they could afford the obligation if you fail to make payments.
- Grandparents and other relatives are the most common co-signers.
- If mom or dad is willing to help out, they should consider the federal PLUS loan as an alternative.
- Remember to shop around before committing to a particular private student loan.
Making Your Case to a Co-signer
Prepare before approaching a potential co-signer with a request for help applying for a loan:
- Do the math carefully to justify why you need to borrow the amount you are seeking.
- Keep in mind that you might need to borrow for more than one year of school.
- Estimate what the monthly payments are likely to be for all of your student loan borrowing.
- Estimate what your income might be after graduation (the career office at your school might be able to help you make these estimates).
- Make sure that your expected monthly payments would fit in your likely future income (experts advise that student loan payments not exceed 8% of your gross income).
- Demonstrate your ability to be financially responsible - show evidence you can pay bills on time and stay organized with paperwork.
- Research private student loan options and select the best loan for you with SimpleTuition.
Once you have outlined this information, you are ready to have a talk with your potential co-signer. Set aside adequate time with your co-signer. Be honest and open with the potential co-signer about how this obligation will be a long-term commitment on their part.
Go over your calculations and loan choices with your co-signer. Be honest about the fact that in order for the loan application to be accepted, the co-signer will need to have a strong credit score (roughly 700 or higher) and will need to document their income.
Applying for the loan
Once your co-signer agrees to help you, complete the application (either online or via phone) together with your co-signer. It is much more efficient if the process is handled in one session. Most lenders will require additional documentation. Find out specifically what your lender requires, fax or mail in the documentation as required as expediently as possible, and always follow up with your lender to make sure they have received it. Most lenders will require up to 30 days during peak season to complete the processing of your loan- so get an early start!
Repaying the loan
Most private student loans allow up to 20 years for repayment. Prepare for the long term and treat this shared obligation as a serious, ongoing commitment.
Here are some tips:
- Make sure you are prepared for the first payment - usually 6-9 months after leaving school.
- Don't miss any payments - this can significantly damage your and your co-signer's credit.
- If you encounter financial difficulties, do two things with respect to your student
o Contact the lender before things get too dire to investigate possible deferment and forbearance options.
o Keep your co-signer in the loop- especially to inform your lender of any change of address, name or contact information.
Tips on Selecting a Co-Signer for Your Private Student Loan
A co-signer of a private student loan is someone who jointly signs the promissory note (or the contract between lender and borrower) for the loan. Even though the student is the primary borrower, and will receive monthly bills and make payments, the co-signer is equally and jointly responsible for the loan's repayment.
The co-signer's responsibility
If the student fails to repay according to the terms of the loan agreement, the co-signer will be responsible for payments. The co-signer's credit would likely be negatively impacted if the student borrower misses a payment or defaults on the obligation. Also, private student loans typically have repayment lengths of 20 years or more - making this a long-term relationship.
Co-signing can expand opportunities for the student
Co-signing a private student loan is a serious step. Nonetheless, co-signing a loan for a student borrower can literally make a college education possible.
Here are some reasons why private student loans are used by so many borrowers:
- College is a great investment, but it is also an expensive one. It may not be possible for the student to attend without supplemental financing from private student loans.
- The Federal Stafford Loan is available in limited amounts; additional borrowing by
the student is often a necessity.
If the federal PLUS loan is not an alternative for the parents of the student, private student loans may be the only other financing option.
- A private student loan is a way for a student to share responsibility for the cost of their education while taking the lead in repayment.
- Most private student loans are specially structured to fit the education experience. For example, deferment options and repayment length are designed to accommodate student borrowers.
- If you know the student borrower well, you probably have some sense of his/her commitment to the obligation.
Tips to Consider When Co-signing
Here are several things to keep in mind when you and the student borrower seek a private student loan:
- Review the reasons for needing the loan. Talk with the borrower about their academic and career plan. Consider whether their decision to borrow private student loan money for this academic program or institution makes sense given their longer term plans.
- Review the loan amount. Go over the costs associated with attending their chosen academic program and review the other sources of financial aid, such as scholarships, grants and other loans, as well as sources of cash payments from savings or from income. Does the amount that the student wishes to borrow through the private student loan seem like too much or too little? Adjust where appropriate, and remember that borrowing less, whenever possible, is always a good decision.
- Exhaust Federal Stafford Loans first. Make sure the student borrower has used the maximum they can borrow from the Federal Stafford Loans before turning to private student loans. The Stafford Loan is a fixed-rate, government-backed loan that doesn't require a co-signer.
- Consider the fixed-rate federal PLUS loan as an alternative. If the student's parent was denied for the PLUS loan, you may be able to co-sign (called an "Endorser") for them on the fixed-rate Federal PLUS loan instead of the variable rate private Alterantive loan. The PLUS loan is advantageously structured and has relatively few credit requirements.
- Shop around. There are many private student loan options out there.
- Make sure the borrower understands what's expected of him/her. Run some numbers to get a feel for what the monthly payments will be. Remember to account for additional borrowing over multiple years.
- Discuss when payments will start. Most private student loans begin repayment six months after leaving school. As co-signer, you might want to make a note of when repayment begins, as well, making a point to reach out to the borrower with a reminder before the first payment is due.
- Complete the loan application together. The application process will be smoother if you and the student borrower complete the application in one session online of via phone. This way you can provide your information directly to the lender and ensure the details are correct.