Cosigning a Student Loan: Pros & Cons

Student Loan Cosigner

Cosigning a Student Loan: Pros & Cons

The process of taking SAT/ACT exams, sending out handfuls of college applications, and eventually deciding on your school of choice is an emotional rollercoaster ride for even the most prepared and least anxious of students. At the very end of this arduous process, students (and parents!) find themselves at the very beginning of the next undertaking: financing a college education.

For lucky students, their parents or extended relatives are there to help. For many others, student loans are oftentimes the only viable option. As an immediate family member, extended relative, or family friend of someone pursuing a university-level education, you may be approached to cosign a student loan.

Much attention is given to student loans, however little attention is given to the impact of cosigning a student loan. For anyone that is considering a role as a cosigner, besides acknowledging the obvious benefit to the student borrower (i.e. they’ll be able to qualify for the loan!), it’s also necessary to know what’s at stake for you.

Who can cosign a student loan:
More often than not, a cosigner can be anyone with a strong credit history who has a willingness to help the student in question.

All lenders have their own cosigner requirements, however many institutions require cosigners to have a credit score of 670 or better and sufficient income to pay back the loan in the event the primary borrower defaults and is unable to repay. There are cases when lenders will go a step further to get a better sense of the cosigner’s overall stability – this can include reviewing the cosigner’s job history, how long they’ve lived in their home, and whether they’ve been in their job for at least a year.

Additionally, one of the least discussed (yet most important!) topics for deciding who should cosign a loan is the cosigner’s health. Many private lenders include language in the lending agreements that allow them to demand that the loan be paid in full upon the death of the cosigner. This is a point that deserves more attention considering that it’s not uncommon for grandparents (many who are older and may not be in their best health) to serve as cosigners.

What does it mean to cosign a student loan:
Personally, I’ve never encountered a student fresh out of high school who met the requirements to take out a student loan without a cosigner. This is likely due to their limited income and minimal (often non-existent) credit history. As the cosigner of a student loan, you are guaranteeing repayment of the debt. As cosigner, you hold a legal obligation to take over debt repayment in the event the borrower cannot keep up.

When banks lend money to borrowers for real estate in the form of a mortgage, the property itself serves as collateral. If the borrower is unable to keep up with their payments, the lender has peace of mind knowing it can cut its losses by seizing the property and selling it to a new buyer.

Considering that student loans are not backed by any physical collateral that can be seized and resold, a cosigner is a bank’s best option to recover an owed student debt.

Naturally, many students look towards their financially-stable family members to cosign student loans.

When parents or family friends of the borrower ask me for my thoughts on cosigning a student’s debt, I ask two questions:

  • Are you prepared for the responsibility to pay off this debt if the borrower cannot keep up with payments?
    • If no, DON’T cosign!
    • If yes, next question…
  • Do you, personally, have any large upcoming purchases/investments that will require borrowing a large sum of money (such as a new home purchase/mortgage or business loan)?
    • If yes, maybe don’t cosign. REASON: The cosigned loans will show up on your credit report and may complicate/restrict your ability to borrow.
    • If no, consider the borrower, your relationship with that person, and your confidence that they will be responsible in repaying the debt. If you accept the risks of being a cosigner and trust the borrower’s explicit commitment to repay the debt – go for it.

Benefits of cosigning a student loan:
For starters, the student borrowers are the primary beneficiaries of a cosigned loan. Cosigners allow students who would otherwise not qualify for a student loan to qualify and secure the funding needed to pursue their education. Additionally, if the cosigner is someone with stellar credit and strong income, the lender may take these facts into account and offer loans with lower, more competitive interest rates.

Many borrowers need cosigners for student loans due to not having much (if any) credit history. By having a student loan in their name and staying consistent on their monthly repayment, student borrowers are making significant (albeit unintentional) strides in establishing a personal credit history.

For cosigners, there’s little personal benefit to cosigning a loan (besides seeing a potential loved one pursue their dreams).

Drawbacks of cosigning a student loan:
A cosigner’s credit score will be impacted if the primary borrower misses a payment. Despite effectively serving as co-borrowers, cosigners rarely ever receive any formal notice that the primary borrower (i.e. the student) has missed payments. Unfortunately, missed payments are a common occurrence that frequently occur when borrowers are not setup for autopay or when a new loan servicer assumes the loan.

Another drawback to cosigning a loan is its impact on the cosigner’s debt-to-income ratio. As discussed before, the cosigned loan will show up on a cosigner’s credit report and may therefore reduce the cosigner’s ability to qualify for a personal loan or mortgage. Even if able to qualify for the loan, the increased debt-to-income ratio may result in the cosigner ending up with a less competitive interest rate.

In the event that the borrower is unable to repay the loan, collection agencies will look to the cosigner for payment. For most cosigners, this is the most significant drawback to cosigning a student loan and the one that must be most seriously considered when deciding to serve as a cosigner.

Even in the best of circumstances, a borrower and cosigner’s financial entanglement leaves the door wide open for relational stress.

How to decide whether to cosign a loan:
Making the final decision whether or not to cosign is personal. At a minimum, cosigners should have a sincere conversation with the prospective borrower to ensure the borrower understands the implications, and risk, to a) themselves and b) the cosigner.

It’s recommended that prospective cosigners also take an inventory of their own finances during this process. Be sure to consider your credit and to factor in whether or not any upcoming expenses will require a loan.

How to get a cosigner release:
Unfortunately, loan servicing companies never voluntarily let borrowers or cosigners know when they qualify for a cosigner release. Getting a cosigner release for a student loan typically requires that the borrower has graduated from school, has made at least 12 on-time payments, and has a sufficient credit score (credit score > 600) and income to repay the debt on their own. Additionally, it’s also typical that loan servicers will request the borrower (not the cosigner) to initiate the release process.

As a financial planning firm, we have clients who are the borrowers and others who are the cosigners. Regardless of borrower/cosigner status, we always work to have cosigners released as soon as possible.

  • Benefit of cosigner release to borrowers: Many private student loan promissory notes have provisions that allow the servicer to place the borrower in default (even if payments have been made on time) if the cosigner dies or files for bankruptcy. Releasing the cosigner as early as possible can prevent borrowers from experiencing surprise defaults and student loan balances automatically being due in full that are no fault of their own.
  • Benefit of cosigner release to cosigners: A parent or family member opts to cosign a student loan so that the borrower can pursue an advanced education. From the very beginning, it should be understood that releasing the cosigner should be a priority following the borrower’s graduation. Getting released as a cosigner means the former cosigner’s credit will no longer be impacted by missed payments and that the original borrower will be fully accountable for the debt.

The Consumer Federal Protection Bureau (CFPB) offers sample letter templates that borrowers/cosigners can send to servicers to request a consigner release.

For additional reading, our co-founder, Dennis McNamara, was featured in Forbes on this topic: https://www.forbes.com/advisor/student-loans/pros-and-cons-of-co-signing-a-student-loan/

Webinar: Financial Crash Course For DOCTORS

FINANCIAL CRASH COURSE FOR DOCTORS

wHealth Advisors is excited to announce a free webinar to help doctors (and those in training) get on a path towards financial independence.

Financial independence? Say what?

In a nutshell, financial independence means being financially secure enough that you continue working because you want to, not because you need to. Everyone’s situation is unique. Just as a good salary does not guarantee financial independence, mountains of student debt does not disqualify you.

For some, financial independence will mean making sacrifices. To others, it’s life as usual. In any case, it requires a vision, setting intentions, and having a roadmap that can evolve with you over time.

When: The Financial Crash Course for DOCTORS webinar will be given FOUR times (live) each Wednesday at 5pm (EDT) through the month of May. Seating is limited to 100 participants per webinar. We ask that you register using your work/school email – priority will be given to medical professionals.

What we’ll cover: Timely and timeless topics including:

  • COVID-19 Legislation: The impact on stimulus checks, student loans (including PSLF), and mortgages.
  • The NINE money mistakes doctors keep making
  • Fundamentals of Fiscal Fitness
  • Building a rock-solid financial foundation
  • The Juggle: Investing vs. student loan repayment
  • Physician mortgages: When they make sense (and when they don’t!)
  • Human capital: Investing in yourself

Why doctors? wHealth Advisors was founded on serving the medical community. While we can’t provide the resources they need most during this time (namely, PPE), we can offer what we know best: objective, evidenced-based financial guidance with no sales agenda or conflicts of interest.

The intended audience for this webinar includes those who are:

  • Medical/dental students
  • Interns/residents/fellows
  • Attendings or established docs that graduated medical/dental school within past 15 years

FIGS Giveaway: Following each webinar we will be randomly selecting a winner for a $25 FIGS gift card. Registering for the event is an automatic entry. Also – be sure to tag friends, classmates, and colleagues on our webinar-related Instagram posts (@whealthadvisors). More tags = more entries (limit = 10 total).

For any questions, please feel free to contact us at hello@whealthfa.com.

Follow links below to register on preferred date:

May 6, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_eZ7hj5awSyaVwOqBejqDOg

May 13, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_O2-njPcSQ_OeyH_H_57FJw

May 20, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_tX3J4IHTSh6IyNEqVNZtRw

May 27, 2020 5:00 PM Eastern Time (US and Canada)

  • https://webinar.ringcentral.com/webinar/register/WN_FvLsh_flRRWpOf2GdV6SjQ

 

Terms & Conditions

Additional Resources:

Student Loans:

  • freestudentloanadvice.org: Great resource and created to ensure that all consumers have access to fair, free, student loan advice and dispute resolution.
  • www.nslds.ed.gov: National Student Loan Data System – best place to go when creating an inventory of your Federal loans.
  • www.annualcreditreport.com: Best place to go when creating an inventory of your private student loans.
  • Gradaway.com: Affordable student loan refinancing/consolidation company
    • $248 for balances < $100k
    • $349 for balances $100k – $250k
    • $449 for balances over $250k

Stimulus Checks:

NAPFA-Advisor-Checklist: NAPFA Checklist for interviewing Financial Advisors

Five Fundamentals of Fiscal Fitness

The Coronavirus and Market Volatility

Coronavirus

The world is watching with concern the spread of the new coronavirus. The uncertainty is being felt around the globe, and it is unsettling on a human level as well as from the perspective of how markets respond.

At wHealth Advisors, we accept the fundamental principle that markets are designed to handle uncertainty, processing information in real-time as it becomes available. We’ve witnessed this volatility over the past 3-4 weeks. Such declines can be distressing to any investor, but they are also a demonstration that the market is functioning as we would expect.

Market declines can occur when investors are forced to reassess expectations for the future. The expansion of the outbreak is causing worry among governments, companies, and individuals about the impact on the global economy. As an example, last month Apple announced that it expected revenue to take a hit from problems making and selling products in China. Airlines are preparing for the toll it will take on travel. Local businesses are worrying how their bottom lines will be impacted from preventive measures such as self-quarantines and social distancing. From the largest companies in the world down to our corner coffee shops, these are just a few examples of how the impact of the coronavirus is being assessed.

The market is clearly responding to new information as it becomes known, but the market is pricing in unknowns, too. As risk increases during a time of heightened uncertainty, so do the returns investors demand for bearing that risk, which pushes prices lower. Our investing approach is based on the principle that prices are set to deliver positive future expected returns for holding risky assets.

We can’t tell you when things will turn or by how much, but our expectation is that bearing today’s risk will be compensated with positive expected returns. That’s been a lesson of past health crises, such as the Ebola and swine-flu outbreaks earlier this century, and of market disruptions, such as the global financial crisis of 2008–2009. Additionally, history has shown no reliable way to identify a market peak or bottom. These beliefs argue against making market moves based on fear or speculation, even as difficult and traumatic events transpire.

When it comes to managing your portfolio, it’s prudent to develop (and stick with!) a long-term plan than can be maintained in a variety of conditions. For our clients, we consider a wide range of possible outcomes, both good and bad, when helping to establish an asset allocation and plan. Those preparations include the possibility, even the inevitability, of a downturn. Amid the anxiety that accompanies developments surrounding the coronavirus, decades of financial science and long-term investing principles remain a strong guide.

We send our best to you and yours. Wash your hands, avoid touching your eyes/nose/mouth, and, as always, feel free to contact us at hello@whealthfa.com.

10/16/2020 Editor Note: Our co-founder, Dennis McNamara, was featured as a financial expert on Dr. Wealth where he weighed in on investing in a post-COVID world. Link to contribution here: https://www.drwealth.com/investing-in-post-covid19-world/