To Cosign or Not To Cosign, That is the Question

My nephew has asked me to cosign a private student loan for college. He’s on his own since he lives independently from his mother, his parents are divorced, and his father is completely out of the picture. He’s made it through 2 years of college with great success. I’d like to help him. I have very good credit. What would be the best way to do this? I understand that he got a $5,000 grant and a $12,500 government loan. Since he wants to go to a private college, he still needs about $12,000 for the year. — Jacqueline P.

Think twice before cosigning a private student loan. A cosigner is a coborrower, equally obligated to repay the debt. If your nephew is late with a monthly payment, it will be reported as a delinquency on both his and your credit records. If he defaults on the loan, it will ruin your credit too, and the lender will seek repayment in full from you. In fact, most lenders will start seeking repayment from the cosigner the first time the borrower is late with a payment, even if the payment is only a few days late.

On the other hand, if you have good credit it will increase your nephew’s chances of getting a private student loan and may result in a lower interest rate too. This will save him a lot of interest over the life of the loan. If you trust your nephew and he is reliable, cosigning a loan can help him pay for school.

It looks like your nephew may be borrowing excessively. A $12,000 private student loan on top of a $12,500 Stafford loan is a lot of debt for just one year of college. Perhaps there is a less expensive public college he could attend instead? He’s in a difficult financial situation, with no parents to help him, so he may have no choice but to borrow some private student loans. But he should keep the private student loan debt to a minimum and carefully consider how he will be able to afford to repay his student loans after he graduates.

My daughter has attended an expensive private college for two years. I took out a loan for the first year, her dad for the second (we are divorced). She will have to pay for the next two years herself with loans. This was her choice — she could have gone to a cheaper school and had it paid for in full by us. I am worried about cosigning. I see that several lenders offer a cosigner release option after the borrower makes several years worth of on-time payments in a row. But I’ve read that many people are having problems getting released. Can you shed any light on any of this? What about a contract between my daughter and me that says that she would have to eventually repay me if she defaults? I do want her to finish her education, but I also need peace of mind. — Val F.

Many lenders offer cosigner release options after the borrower has made the first 24, 36 or 48 monthly payments on time. But the borrower also has to have very good credit. When lenders tightened eligibility standards on their private student loans during the credit crisis, they also raised the minimum FICO score required for cosigner release. They also review the borrower’s credit history carefully, so the borrower must have a steady job sufficient to repay the debt on her own. The tougher standards have made it much more difficult to qualify for a cosigner release.

Another option is for the borrower to obtain a private consolidation loan on his or her own. Since this pays off the original private student loans, it effectively releases the cosigner from his or her obligation. Unfortunately, more than 4 out of every 5 private student loans, including private consolidation loans, require a cosigner.

Have you considered obtaining a Parent PLUS loan instead of a private student loan? It is a parent loan, so the student is not obligated to repay it. But you could enter into a written agreement with your daughter where she commits to making the payments on the loan. The Parent PLUS loan does not depend on financial need, and payments can be deferred while the student is in school and for six months after graduation. The Parent PLUS loan has a fixed interest rate, so it is likely to be much less expensive than a variable rate private student loan in the long run.

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