Why Do I Need a Co-Signer for My Student Loans?

As students and young adults prepare for college, it is not uncommon for them to need financial assistance to help cover the costs of their education.

And when financial aid is not available or doesn’t cover enough of the costs, a student loan could be a solution.

Needing a loan is not uncommon.

In fact, student loans are the second most common loan — mortgages are the most common.

And, in some situations, a cosignatory, more commonly known as a cosigner, could be necessary.

Asking a parent or guardian to co-sign a loan can have its benefits, like potentially getting a better interest rate.

But it’s important to know that when a person co-signs a loan, they are agreeing to cover the expenses should the student default on the loan.

So, the decision is not one to be taken lightly.

A co-signer could be necessary depending on the student’s credit history and the type of loan, like a federal or private loan, but having one to depend on could be tough.

Determining if a co-signer is needed will predominately be determined based on the type of loan.

Private Student Loans

Private student loans are issued by banks, credit unions, and online lenders.

As a result, there are a variety of loan options available including interest rates, loan amounts, and repayment terms.

Some lenders offer a prequalification process, which can quote you with a conditional interest rate before performing a credit check.

Lenders will consider several factors when a student applies for a loan. These factors include credit history, credit score, income history, and employment history.

These factors help to determine if the borrower is a risk. Lenders can also use this information to determine the interest rate and how much can be borrowed.

The majority of college-aged students don’t have an extensive credit history. And many students have income limitations, whether they are enrolled full-time or part-time.

It’s quite common to have a student loan co-signer when applying for a private loan.

Federal Student Loans

The United States Department of Education issues federal student loans. Applying for a government-backed loan requires students or borrowers to complete an application for Federal Student Aid (FAFSA).

If the student is listed as a dependent on a parent or guardian’s tax return, their information will be needed as well.

Based on the information provided, a few different federal loan options.

  • Direct Subsidized Loan: The college or university will decide how much will need to be borrowed based on your level of financial needs. The U.S. Department of Education pays interest while the student is in school and for the first six months after the students leaves school. After this grace period, the student will begin to make payments on the loan.
  • Direct Unsubsidized Loans: This type of loan is available to undergraduates and graduate students without financial need. The school will determine the loan amount by examining tuition costs and fees, while taking into account any financial resources. Interest begins to accrue on the loan once the funds are accepted.

It’s rare for students to need a cosigner when applying for a federal student loan.

Federal student loans typically don’t require a credit check, meaning students are likely to get a loan even if their credit history isn’t perfect.

Government-backed student loans have fixed interest rates for the life of the loan. A fixed interest rate has its benefits, but also means the borrower can’t get a lower rate if they have good credit or a co-signer.

Finance Your Future

There are certainly benefits to having a student loan co-signer, like receiving a better interest rate.

But there are other options if a co-signer is not available — making it important to do extensive research prior to securing a loan.

For more information about loans, investing in your future, creating a sustainable budget, and increasing your credit score, contact our financial team today.