Before even stepping on campus, many potential college students will need to answer an entirely different question: “How will I pay for college?”
It’s not an easy question to answer, either, given that tuition has risen at three times the rate of inflation over the past several decades.[1] The means it may be no longer feasible for most students to bootstrap their way through four years of school, whether with a part-time job or by working summers.
According to Kristin Balazentis, PNC’s Senior Vice President, Student Lending, “Without a loan for college, many students are going to be challenged to find a path to their degree. Either that, or they’ll have to pay as they go, by working or paying with credit cards. And, given the rapid rise of costs for higher education, those options will have their own challenges.”
Yet, because most are starting out in life, students typically do not have strong enough credit to secure a private student loan on their own. So, obtaining a co-signer with a strong credit history may be the student’s only option.
What Is A Co-signer?
A co-signer is someone who, along with the borrower, will take full responsibility for paying back the loan. The co-signer is obligated to pay any missed payments and even the full amount of the loan if the borrower doesn’t pay. The co-signer’s credit also can be negatively affected if the borrower is late making payments.
Who Can Be A Co-signer?
Co-signers for a student loan almost always have a close and trusted relationship with the student. This typically means a parent, family member, guardian, or close family friend.
When approaching a potential co-signer for a student loan, it’s important to recognize and respect the obligation the co-signer will be shouldering over an extended period. It’s also important to understand that the co-signer will be undertaking considerable financial risks.
What Are The Advantages?
“With a co-signer, a student should be able to secure better loan terms and rates, particularly if the co-signer has a high credit score,” Balazentis adds. “At the same time, if a student makes timely payments on the loan, he or she will have the opportunity to build credit over time. And that will help with future borrowing needs, such as a home or vehicle purchase.”
What Are The Drawbacks?
Of course, there are potential drawbacks, too, especially for the co-signer. For starters, it will affect both the primary borrower’s and the co-signer’s overall debt-to-income ratio (DTI), the amount of money that is borrowed as a percentage of total income. If a co-signer is overcommitted on the student loan, it might affect their ability to borrow money for other purposes.
At the same time, the co-signer shoulders the responsibility of paying the loan should the student fail to make payments on the debt. This could mean potential issues for the co-signer’s credit score with implications for future credit needs. However, according to Balazentis, “Many private student loans offer an application process for a co-signer to be released from a student loan after a certain period of time and once certain conditions are met. Or, the student may choose to refinance the balance of the student loan, thereby releasing the co-signer from the obligation.”
Finally, there are personal considerations. For example, if a borrower fails to remain current on the student loan, it could create long-term relationship issues with the co-signer.
Considerations Before Applying With A Co-Signer
While there are benefits to obtaining a co-signer for a student loan, it’s important that both parties fully understand the loan’s terms and the personal commitments being made before applying.
The prospective borrower should recognize their responsibility to repay the loan. At the same time, the borrower should be aware of the financial risks the co-signer takes on by helping finance their higher education. The co-signer also should recognize their role when signing for a loan in this capacity.
In short, co-signing a student loan is a long-term commitment. However, if both student and co-signer work together, they ultimately create a brighter future for the student.
Private Student Loans: Student Lending Center (pnc.com)
