The Lowdown on Co-Signing

There are a lot of things to consider when you take out a private student loan. Of these, whether or not to apply with a co-signer tends to be a popular question among students and young professionals.

A co-signer is an individual that agrees to be your backup in the event that you cannot make payments on your loan or credit account. They are especially important if you do not have an established credit history or have negative credit report / low credit score. For most students, the first case is quite normal; you’re likely young, so credit products have not been available to you long enough to build up any substantial amount of credit history.

If you’re worried about being approved for a loan, who you choose as your co-signer can have a huge impact. That being said, there are a few solid rules to follow in selecting a co-signer that will greatly increase your chance of being approved with a low interest rate:

They need to have a long credit history. You want at least 5-8 years of positive, non-delinquent records.The higher their credit score, the better.The lower their debt to income ratio, the better.

#3 can actually consist of a lot of different things. For credit cards, they should carry less than 50% of their credit limit at any given time on each of their accounts. More than 50% indicates a lack of ability to repay their debt and weakens their ability to be a creditworthy co-signer. For long term debt, they need to be in a position where they aren’t stretching every dollar to pay their mortgage every month. That doesn’t mean rich, it just means living within their means.

Lastly, you should make sure that the person you select is trustworthy, and trusts you in return. This is a big decision and going into it without full confidence in the other is never a good idea.

If you use those criteria, you should be in a much better place to be approved for a loan. Also, keep in mind that a co-signer does not have to be an immediate family member; if you have a generous friend that is willing to help out, they could certainly be a co-signer on most types of loans.

Finding a co-signer may not always be easy because they might be worried about the “what ifs” such as “what if the holder can no longer pay due to injury or death?” While these situations are rare, they do happen. Currently, there is no private loan co-signer discharge in the event of the holder’s death or permanent disability. Federal loans offer a complete loan discharge for the co-signer, but private loans have yet to jump on board. So what can you do? Many lenders now offer co-signer releases. If the primary loan holder completes school and makes a certain amount of on-time payments, then they can apply to have their co-signer released from all responsibility.

Last but not least, some useful reading: Reluctant Cosigner? There’s a solution for that.

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