The skinny on co-signers
Let's talk about co-signers. These are the generous folks who agree to sign on to a private student loan along with the student.
Why do students even need a co-signer? Well, for undergraduates, the usual reasons are that the student has not yet established a credit history and doesn't have an income. Absent these indicators of a borrower's likelihood and ability to repay a loan, lenders are usually not willing to put their money at risk. There may be some lenders who make exceptions, and indeed, for graduate and professional students, lenders will often make private student loans without a co-signer.
For the most part, an undergraduate student will need a co-signer to qualify for a private student loan. But there's more to the story. The student should try to line up what the industry calls a "creditworthy co-signer." That is, someone whose credit is "worthy" or strong. Any old co-signer won't cut it. Plenty of co-signed private loan applications are denied because the co-signer's credit wasn't strong enough.
And the stronger, the better. Pricing (the rate and fee combination) on private student loans is usually tiered. Borrowers and co-signers with stronger credit profiles get better (cheaper) pricing than those with weaker credit. Pricing on a loan can range as much as 5.00% or more in APR from borrowers with weaker credit to those with stronger credit profiles.
So what does "strong" mean? Unfortunately, there is no magic number, but it helps to know what the range of credit scores are. Credit scores range from 300 to 850, and the median score in the United States is 720. So, you are much better off with co-signer whose credit score is above 750, than one who is below 700.
Keep in mind that a co-signer is an equal party to the loan. If the borrower - who is usually the one receiving the monthly bills - is delinquent on payments, the co-signer will probably be contacted to pick up the slack. And if the borrower defaults, the credit profile of both the borrower and co-signer will be dinged.
Agreeing to co-sign a loan is a substantial, long-term commitment. Both people should be aware of their obligations, and co-signers should not be shy about inquiring about how well the borrower is managing repayment. Because private loans frequently have repayment lengths of 20 years, the need to stay on top of repayment could last decades. Some private loans offer a feature called "co-signer release." This provides for a release of the co-signer from the obligation after a certain number of on-time payments. However, it's not automatic. The borrower usually has to pass a substantial credit test on their own at that point to complete the release.
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