Talking to parents and mentors about student loans is hard enough, but when it comes to answering cosigner questions, a lot of students are left in the dark. Who do you ask? What do you say? How will this affect them?
Let’s be real: High school students hardly even know what a credit score is, let alone how it affects their financial futures. So when it comes to asking a parent or guardian to cosign for a loan, there may be a lot of questions high school students can’t answer.
That’s where we come in.
Looking to borrow for school?
For more information on student loans, or to start an application, click here.
By understanding what a cosigner can do for your loan, and what it means for their credit, you can arm yourself with the information you need to make sound choices. At the very least, you’ll sharpen your pitch to a potential cosigner.
Basic Cosigner Questions
So what’s all this fuss about a cosigner in the first place?
There are a few reasons for that. First, is that federal loans only go so far. The cost of college has seen steady increases in recent years, but the amount you can borrow per year in federal loans hasn’t kept up for most schools. That creates the need for funds to help students cover costs.
Insert private loans. The catch? Most private loans take solid credit. And unless you started building your stock portfolio in middle school, that means you need to borrow the credit of someone else. And THAT is why cosigners are so crucial when it comes to covering the cost of college.
Now onto the more confusing cosigner questions.
The Cost of Cosigning
The first question you’re likely to face whenever you ask for financial help is the same, especially for cosigners,”What’s it going to cost me.”
In a direct sense: Nothing. Being a cosigner and on the loan does not affect your credit the same way as applying and taking on credit yourself. There is still a legal obligation that comes with signing, and a few other key aspects you will want to explain to your cosigner, though.
First is that cosigning is more than just lending your credit score for a favorable interest rate. Being a cosigner means that you are financially on the line should the borrower be unable to pay. Obviously no one plans on defaulting on a loan. Life happens, though, and it’s important to be honest about the risk.
Cosigners also take on the burden of the debt in terms of debt-to-income ratio. The debt-to-income ratio is a key metric that borrowers use to evaluate whether or not to issue a loan. It’s a simple concept: You add up all that you owe, and compare it how much you make. What’s not so simple is how it applies to your credit.
Debt-to-income ratios do not directly affect your credit score. It is still something banks consider when lending. Your cosigner’s credit score will not drop, but the bank sees the monthly payment as part of the cosigner’s debt-to-income ratio.
This is one area where communication with your cosigner is important. What are their financial goals in next five years? What about the next 10? Student loan debt doesn’t disappear overnight, and it has long term effects beyond the risk of having to potentially cover payments.
Most lenders use debt-to-income, or DTI, whereas CommonBond uses a proprietary algorithm that examines free cash flow. Borrowers who don’t qualify under a minimum debt to income ratio may qualify under free cash flow.
Talking through cosigner questions in an open and honest way will help you address these issues BEFORE you sign on the dotted line, and completely understand what you and your cosigner are getting into.
Early, Often and On Time
There is one way your loan can affect your cosigner: Late payments.
One of the key metrics all of the major credit agencies use in determining your score is on-time payments. That’s why it is extra important to stay vigilant over the marathon that is student loan repayment. Especially if you have a cosigner.
If you want to repay your cosigner without handing over a cash tip, the best way you can do that is taking repayment seriously. A single missed payment can affect the financial future of your cosigner, and a serious slip up could cause problems you may not be able to fix.
The best strategy? Being open, honest and creating a plan.
Like I said above, life happens, and if you slip up, the burden shifts to your cosigner, both in actual cost of repayment and derogatory marks on their credit score. That’s why it’s so important for you to be honest about the financial burden your cosigner is taking on. Even if it’s just for a month or two to help cover in tough times, having a cosigner than can help you bear the burden in tough times will be mutually beneficial for both parties.