The ups & downs of a cosigned student loan
Because tension isn’t good for anybody
There’s an old riddle that goes like this:
“What’s between the kite and the string?”
Just in case your college professor asks you, the answer is tension. Tension keeps the kite in the air and prevents it from crashing. While there’s a lot of info on how easy it is to get a cosigned student loan, tension isn’t what makes college students succeed — and that’s exactly what cosigning does. Cosigned loans mean serious tension between you and your family. Regardless of the situation, students need to attend college full-time, and need a way to pay for it.
In terms of financing college, the way out starts to seem long, winding, and riddled with kite-and-string obstacles that create tension. Most student loans that don’t involve a guarantor require a good credit score and a steady income — something students just don’t have until they’ve begun their careers. It puts you in a box, and most have to ask a family member to cosign for them. This means, parents are on the hook to repay the loan if their child doesn’t, regardless of their current financial situation. Seems a bit backwards, doesn’t it?
If you’ve researched college financing options, you’ve read about federal student loans. These loans are typically smaller and come with lower interest rates. Federal student loans don’t require a cosigner. Unfortunately, also they don’t cover the amount students need to fully fund college, either. This leaves students scrambling to pay the difference, causing them to turn to private student loans. Private loans come through banks and various agencies, and can fund all of your college expenses.
But there’s a catch.
Throughout the financial aid process, college students are often targeted online with extremely low APR deals. These offers aren’t for students, they’re for parents.. which is why these deals always require a co-signer. Banks prefer to underwrite your parents — it creates a safer deal for them that they’ll get their money back.
Without a cosigner, you’re expected to have a good credit score (at least 660) and a stable income — something most college students don’t start out with. Few doe-eyed 18 year-olds have enough credit history to prove their responsibility, because there isn’t much on paper to prove it. And the only way students would have the income needed to prove they can repay is by making at least $25,000 per year before college.. which banks know isn’t likely.
Even when student loan hunting your junior year of college, you’ll only have two years of credit history.. which still isn’t enough for banks to lend to you without a backup. It’s their job to lower the risk. So the odds that you’ll get a student loan without a cosigner are extremely low. This leaves many hardworking, career-driven students without support unable to get the financing they need to stay on track in school, solely because banks won’t approve them.
As if the loan process isn’t stressful enough, this is where the burden falls on your family. Banks will apply pressure on you to find a cosigner. This is the situation that most college students in the US find themselves in. It’s an awkward task — asking your parents, or sweet grandma Bernadette, to swear on their income that you’ll repay your loan.
So what should you do?
The positives to having a cosigner
Students with cosigners receive a better interest rate on the amount they borrow, because the lender combines your two scores together. 10% of students don’t lean on a cosigner, and they face much higher rates because of it, by going through private lenders. 10% doesn’t seem like much now, but after college, it amounts to a shock-worthy figure. Lenders raise the rates to protect themselves, since a student loan without a cosigner is riskier on paper. Cosigned debt obligations allow students to attend school at fair interest rates. These private student loans will also cover the expenses that the federal student loans won’t.
Student loan lenders that don’t require a cosigner include Sallie Mae, U-fi, Discover, and Citizen’s Bank. Many public financing corporations won’t lend to a non-US citizen, without a US citizen cosigning.
The negatives to having a cosigner
Having a loved one cosign on a student loan is risky business. If the cosigner falls into economic hardship, and needs to take out a personal loan or mortgage their house, your student loan may ruin their chances. Cosigning a loan puts your family members on the hook to pay your debt, with interest, should you be unable to. And this is common. 90% of all private education loans are cosigned.
Sky-high rates not only create tension for you, but they also fall on the shoulders of your loved ones if you can’t afford the payments after college. A $45,000 loan that grandma cosigns will become a $60,000 loan with interest, and could cause her to lose her house should your career path see an economic downturn. Having a cosigner guarantees financial tension in your family.
Banks create a limit of how much credit can be in your name based on your credit score. But doesn’t stop there. If you face financially stressful times, the lender will come after your family members to be repaid, and would sue them first, before coming after you.
Sometimes with repayment trouble, the lender will settle on the amount that’s owed, and file for a tax liability instead. This means, your credit report will see a negative mark, and you’ll have to pay a ‘debt-forgiveness income’ amount when you file your taxes.
There’s a way to do it.
Taking out private student loans without a cosigner is completely possible, but the disadvantages tend to stack up. Unfortunately, federal financing limits haven’t increased with the rise of college tuition. Over time, a high interest rate on a student loan without a cosigner becomes costly.
Work to build credit as soon as possible to improve your interest rate. Some banks offer college credit cards with low spending limits. Start building credit by getting a credit card and paying your bill on time. Credit building is still an incredibly slow process, so starting as soon as possible could give your score a healthy boost.
The best way is to seek options that don’t include a cosigner, while simultaneously building your credit. Fill out your FAFSA early, so that you can get a head start on adding what college will cost you to attend. By planning ahead, only borrowing what you need, and finding the right lender who will work with you, you’ll create less tension for yourself, and your family, after graduation.
Funding University is a private lender that underwrites students based on their chosen career path. Where most lenders depend on FICO scores and cosigners, Funding University’s formula depends on your potential in your chosen field. To learn more, or see if you prequalify, visit www.funding-university.com.