Additionally, if student loans are necessary, Federal Student Loans should be used as the student’s primary borrowing source. Federally backed loans typically don’t require a cosigner and provide additional benefits like lower interest rates, payment deferral while in school, tax deductible interest, and the possibility of deferral or forbearance during repayment.
Private and Supplemental Student Loans Often Require a Cosigner
There are times, however, when college savings, scholarships, grants, and federal loans just aren’t enough. Under these circumstances, students and their families can begin looking at private & supplemental loans like New Jersey College Loans to Assist State Students (NJCLASS) available through HESAA.Because most college students either don’t have a good credit score or don’t have an established credit history, many private and supplemental lenders require a cosigner on student loans, but Cosigning a Student Loan Can Be Risky. Understanding how cosigning works is critical in this situation.
Why Is a Cosigner Needed?
Private and supplemental student loans are termed as unsecured consumer loans. That means that they are not backed by the government and they aren’t secured by a tangible asset like a house or a car, making them riskier investments because there is nothing to repossess if the loan defaults. When a student doesn’t have a good credit score or an established credit history, financial institutions will also see them as a risky investment because there isn’t any historic data indicating that this person is likely to pay back the loan. This typically results either in high interest rates, low borrowing limits, or both. It can even result in being turned down for a loan altogether.
However, many lenders will consider extending a loan with better terms if somebody is willing to cosign the loan with the primary borrower. The credit score and history of the cosigner will be taken into account and allow the lender to offer better interest rates, borrowing limits, and loan terms. While most student loan cosigners are the student’s parents, a cosigner doesn’t have to be related to the borrower.
What Does Cosigning Mean?
A cosigner — as the name indicates — signs the loan in tandem with the primary borrower. In essence, they guarantee that they will cover the debt if the primary borrower fails to pay back the borrowed money. Even though they don’t receive any money from the loan, the cosigner takes on equal responsibility for repaying the debt.It’s important to note that any cosigned loans will show on the cosigner’s credit rating and credit history, and any late payments on those loans can and will affect their ability to borrow money themselves. If the primary borrower fails to make payments or defaults on the loan, the cosigner can be held responsible for repayment of the debt.
Cosigning a Student Loan Is a Big Responsibility
In many ways, cosigning a loan isn’t that different from taking out a loan yourself. Until the loan is paid back, you are financially responsible for its repayment. Before agreeing to cosign a student loan, you should carefully consider how doing so will affect you and your credit. You will need to be sure that you are willing and able to repay the loan if the primary borrower fails to make payments on the loan for any reason.
If you choose to cosign a student loan, you should carefully consider all aspects of the loan including the loan’s interest rate, term, repayment schedule, and penalties. Then, you should make sure that the primary borrower fully understands the risk you are taking on for them and how their action or inaction can and will affect your financial position.
