If the borrower misses a deadline or makes a mistake, the cosigned loan can hurt the cosigner’s credit score.

Unfortunately for cosigners, DTI and credit score are the two most important factors creditors use when evaluating mortgage, car loan, and credit card applications.

Today we will examine how cosigned student loans impact the cosigner’s credit score and DTI. We will also look at some strategies to minimize or eliminate this impact.

Cosigned Debt is Your Debt

In most cases, lenders and creditors will treat cosigned debt as your debt when evaluating applications.

Your credit report shows a total balance, monthly payment amount, and repayment history. In some cases, it doesn’t show that the loan is cosigned or that the cosigner is not the principal borrower.

Why?

Lenders don’t care. As far as a potential creditor is concerned, you may have to start making payments on the debt. In most cases, they assume that you will be making payments on the debt.

Because almost all lending decisions are made using an automated computer algorithm, cosigners don’t get to explain themselves or demonstrate that the primary borrower is responsible and able to make payments.

One Possible Exception: Some mortgage lenders will exclude cosigned debt from mortgage applications. However, the cosigner usually must show that the primary borrower can make payments independently and has been doing so for at least a year.

If the primary borrower is still in school or on a deferment, the cosigned debt will almost certainly be treated as the cosigner’s own debt.

Debt-to-Income Ratio (DTI) Damage from Cosigned Loans

Because most cosigned loans are “counted against” the cosigner, the most common negative consequence is that it hurts the cosigner’s debt-to-income ratio, usually shortened to DTI.

An applicant’s DTI is critical when applying for a mortgage, car loan, or credit card. Lenders often deny applications if the high monthly bills on your credit report eat up a large portion of your yearly income.

For example, mortgage lenders like to see a DTI below 41%. If you have a modest income and cosign large student loans, getting approved for a home loan will be tough.

Credit Score Risk Only Impacts Some Cosigners

Things are a little less bleak on the credit score side of the equation.

The big risk to a cosigner’s credit score is if the borrower fails to make payments.

If the borrower doesn’t make payments on the cosigned loan, the cosigner has two options:

1. Start making payments on behalf of the cosigner.
2. Live with the damaged credit score and other fallout from failing to make payments on the loan.

It’s worth noting that the cosigner is legally obligated to pay if the borrower fails to make payments. The credit score damage is just the beginning of the issues if the payment is unaffordable for both the borrower and the cosigner.

Removing Cosigners Can Fix DTI and Credit Score Issues

Given all of the risks with a cosigned loan, it isn’t a surprise that many cosigners want to be removed from the loan.

Some lenders even advertise a cosigner release program to entice people to use their services. Sadly, the cosigner release programs are more myth than reality, according to the Consumer Financial Protection Bureau.

Lenders have every incentive to deny the release application. If they grant the release, they only have one person legally responsible for the loan. For this reason, many lenders require the primary borrower to have made at least a year of payments AND pass an additional credit check.

However, if the borrower has a great interest rate on their loan and has built up a strong payment and credit history, seeking a release is a worthwhile effort.

Once the cosigner release is granted, the debt falls off the cosigner’s credit report, solving the DTI issue and preventing future credit score problems.

Cosigner Release Guide: A cosigner release isn’t the only way to remove a cosigner from a loan. Several other strategies are available to remove the debt from the cosigner’s credit report.

Steps When Cosigner Removal Isn’t an Option

If the lender won’t approve the cosigner release, refinancing the debt is a commonly used shortcut.

The process is relatively simple: The borrower applies to refinance their private student loan. If approved, the new lender pays off the old loan, and the borrower begins repayment on a new loan with new terms.

If the cosigner isn’t on the new loan application, they are free from the debt.

Steps to Take if the Borrower Can’t Qualify to Refinance

The refinance option is great when the primary borrower has finished school and begun loan repayment. Refinancing will be much more complicated if the borrower is still in school or struggling financially.

In this instance, cosigning a second time could make sense.

By going this route, the cosigner’s legal responsibility hasn’t changed. However, refinancing might offer lower payments and/or a lower interest rate.

If the refinanced loan has a dramatically reduced monthly payment, the damage to the cosigner’s DTI is likewise reduced. For example, refinancing a 5-year loan into a 20-year loan could result in significantly lower monthly payments.

The downside is that interest spending may increase. However, the borrower can still pay extra to pay off the loan as initially planned; they just have the flexibility of a lower monthly payment.

As the primary borrower’s finances improve, they could refinance a second time to remove the cosigner completely.

As of November 2024, the following lenders advertise the lowest interest rates for 20-year fixed-rate refinance loans:

Rank	Lender	Lowest Rate	Sherpa Review
1		6.08%*	Splash Financial Review
2		6.53%	ELFI Review
3		6.55%	Laurel Road Review

The post How Cosigned Loans Can Wreck Your DTI and Credit Score appeared first on The Student Loan Sherpa.

At the time, I didn’t give much thought to the consequences of consigning. I didn’t weigh the risks.

In my mind, it was an easy decision. Someone I cared about needed help, and all I had to do was sign my name so they could get help. Easy call.

I’m happy to report that things went perfectly. However, even in the best-case scenario, cosigning causes hardships.

When Cosigning Goes Right

My brother was a model borrower.

Shortly after consigning the loan, he bought me a thoughtful gift to say thank you for the help.

The loan he needed was relatively small and managable.

After finishing college, even during hard times, he always made sure his student loan bills got paid.

When the opportunity arose to remove me from the loan, he did it.

I never received a call from the lender about a late payment. We never had an awkward discussion about how his financial decisions impacted me. I never had to step in to make a payment.

It was a by-the-book, perfect cosigner experience.

Luck is Part of the Equation

My brother is responsible and a hard worker. When I cosigned his loans, he had nearly completed his degree.

From a risk-management perspective, consigning for him was relatively low-risk.

However, even in ideal circumstances, a little bit of luck is required.

There is a long list of things that could have gone wrong:

• Health – If my brother got sick during school or after school, it could have made getting a degree and repaying the debt very difficult.
• Job Market – There are plenty of smart and hard-working people unable to find a job after school. Sometimes people loose their jobs unexpectedly. Steady long-term employment isn’t guarenteed for anyone.
• Financial Emergencies – Student loan repayment becomes very difficult if you have a sick child, get a divorce, or are impacted by a natural disaster.

Had my brother faced a severe hardship, my cosigner responsibilities would have kicked in. I’d either have to make payments on his behalf or pester him to ensure the lender got paid despite his hardship.

It is certainly possible to take steps to make sure consigning goes well. However, luck will always be part of the equation. Thus, any cosigner should have a plan if the unexpected or unavoidable happens.

Why Cosigning is Always a Hassle

Even when things go perfectly, there is a downside to consigning.

When I wanted to buy a house, my brother’s student loans appeared on my credit report. In my case, it meant a smaller mortgage. For some cosigners, it may be hard to get a mortgage at all.

Some mortgage lenders are willing to exclude the cosigned debt from the Debt to Income ratio calculations on a mortgage application. However, getting this exception requires additional paperwork, and the borrower must prove they made payments on time, for a least a year, with no outside help.

In short, it was a hassle.

Tips for Borrowers with Cosigners

• Pick the right school and the right degree. If you ask someone to cosign a student loan, make sure it is a good investment. Don’t spend a ton of money on a degree that doesn’t justify the price. Overpaying for an education will make things diffiuclt for you and your cosigner.
• Make smart borrowing choices. Not all student loans are created equal. Find a loan with reasonable repayment terms and the lowest interest rate possible. This usually requires shopping around, but it will make life easier for you and your cosigner.
• Keep the lines of communication open. If you are struggling, let your cosigner know right away. They may even be able to help. If you miss a payment, your cosigner can either hear it directly from you or from a lender collection call. Cosigners don’t want unexpected calls from lenders.
• Say thanks. Your cosigner went out on a limb for you. They don’t benefit from cosigning in any way. A small gesture to show you understand and appreciate the risk they took is a good idea.
• Remove your cosigner from the loan when possible. Some lenders advertise cosigner release programs but qualifying is often a challenge. Fortunately, there are alternative strategies for cosigner release that are more effective. For example, you can refinance the student loans in your own name.

The post The Best-Case Scenario for Student Loan Cosigners appeared first on The Student Loan Sherpa.

For some borrowers, it is the only way to get a loan. For others, it is a way to get a lower interest rate on the loan.

To sweeten the deal, many student loan lenders will also tell you about co-signer release programs that they have. The pitch essentially boils down to the following, “if you pay your loans on time for a year (or two), you become eligible to have your co-signer released from the loan.”

Sadly, the advertisements don’t match up with reality.

Skepticism About Cosigner Release Programs

For years, this site has been skeptical about these co-signer relief programs.

For starters, most lenders are vague about the precise requirements to secure a release, but most do require a credit check. Sadly, the details are usually few and far between.

Most concerning though, is the lack of incentive for lenders to grant a release. Suppose mom and son are on the same loan. Son graduates and gets a decent job, and makes his payments for the next two years. If they apply for a co-signer release, what incentive does the lender have to release mom?

With a co-signer, if the son falls behind on his loans or loses his job, they can still collect from mom. Without the co-signer, they may be out of luck.  As a result, it is pretty apparent that lenders have every reason to advertise a co-signer release program, but every reason to deny people who apply for said release program.

Sherpa Tip: Skip the co-signer release programs.

There are alternative approaches for co-signers to get removed from the loan without navigating a strict co-signer release process.

Consumer Financial Protection Bureau Data Confirms Fears

A report from the Consumer Financial Protection Bureau confirmed my skepticism.

The CFPB reports that most lenders and servicers fail to alert borrowers who may be eligible to have their co-signers released. As a result, a majority of borrowers never even apply for a co-signer release.

For the borrowers who are savvy enough to investigate the program and apply for a co-signer release, over 90% of co-signer release applications are denied.

Any Excuse to Deny

In addition to the obvious credit score and income reasons for denial, lenders have gotten pretty creative in finding reasons to deny a co-signer release application.

For many lenders, a forbearance means an automatic co-signer release denial for the life of the loan. The CFPB notes that this aspect hit recession-era grads especially hard. When they got out of school and could not find a job, lenders were happy to provide forbearances for the grads. Many of these grads have been employed for a while, so they are applying for co-signer releases. Instead of getting the release, they are informed that because they once needed a forbearance, they will never be able to release their co-signer.

Perhaps even more shady is the co-signer release denial for making extra payments. This issue can be attributed to some clever lending accounting practices. The prepayment problem is especially common for people who paid several months worth of payments and then never made payments when they got bills reading $0.00 due. The CFPB did note that such a practice may violate Federal Law, so borrowers may have options in that circumstance.

Many other borrowers also report being denied a co-signer release for no reason in particular. If the lender doesn’t give a specific reason for the denial, the borrower has no way to improve their application for a future attempt, nor can they complain if it was the result of an unethical or illegal practice.

What should I do if my co-signer release is denied?

When it comes to evaluating the co-signer release application, lenders have all the power. However, that does not mean that borrowers are unable to find a better situation.

This site has previously extensively detailed options for borrowers who were denied co-signer releases.

In short, your best bets are to file a complaint with the CFPB, publicly shame your lender into doing the right thing, or use your good credit to take your business elsewhere by refinancing your loans with a new company.

The post The Co-Signer Release Myth Exposed by Consumer Financial Protection Bureau appeared first on The Student Loan Sherpa.

Every year college students across the country cannot qualify for loans on their own, so they go to family and friends to get the loan cosigned.

Cosigning a loan means more than just vouching for someone’s ability to pay. If the borrower fails to make payments on the loan, the cosigner is on the hook.

Many cosigners fail to consider the possible consequences if the borrower cannot make payments. Facing this harsh reality is a scary moment for many consigners. As the primary borrower, there are several things you can do for your cosigner, even if you can’t make payments.

Managing a Student Loan You Cannot Afford

Lenders tend to have very little mercy when it comes to loans where there is a cosigner. After all, if you can’t pay, they have another person they can go after who is legally obligated to pay the debt.

If you are afraid you cannot pay, the critical first step is to call your lender to discuss the options available. Some lenders will tell you there is no choice, while others may offer extended plans or graduated plans that can give you lower payments in the short term. In the worst-case scenario, a deferment or a forbearance might work temporarily. However, borrowers should exercise caution with this route as it could make things worse.

Sherpa Tip: Getting a cosigner release is a great way to help your cosigner. It removes their legal obligation to repay the loan.

However, if you are struggling to keep up with student loan payments, the options for a cosigner release are unlikely to be successful.

Talking to Your Cosigner

If you can’t make your monthly payments, your cosigner will find out.

As the borrower, you have a choice. The cosigner can find out there is a problem because they received a collection call from your lender. Alternatively, you can call your cosigner to warn them of the upcoming trouble.

This conversation isn’t easy, but it is necessary.

For some cosigners, maintaining their credit score may be more important than the money in question. They may decide to immediately take over the payments so that their credit is not negatively affected. A heads-up phone call gives your cosigner time to explore their options and make the necessary preparations.

Have a plan to fix your situation

It isn’t pleasant telling someone that you can’t pay your bills and that they are about to get a call from your creditors, but it is unavoidable.

To make it go a little smoother, have a plan to address your issues.

Start by talking about the options that you explored with your lender. Outline the steps that you took to avoid getting into this situation.

Next, outline your budget. Finances are typically a more private matter, but in this case, it is the business of your cosigner. Share the costs that you cut out of your life in an attempt to stay caught up and outline your monthly budget. This shows the effort you put into avoiding the situation and creates an opportunity for you and your cosigner to discuss ways out of the problem.

Financial issues can put a strain on any relationship, so the more you can do to put your cosigner at ease, the better. If you are hunting for a job or have an idea for ways to fix this situation, it may put your cosigner at ease.

Possible solutions to a complicated situation

Sometimes the credit score of the borrower and the cosigner gets damaged. Another common outcome is that the cosigner starts making payments for the borrower. However, there are also a couple of long shots worth trying.

If the cosigner is also in a difficult financial situation, another call to your lender may be in order. For example, Navient has a rate reduction program for borrowers struggling to keep up. If you call with your financial details AND your cosigners, you might still be able to enroll. This could result in a dramatic reduction of your interest rates and might be your chance to get things under control.

If your cosigner has excellent credit, refinancing the loan might also be an option. There are a large number of companies offering student loan refinancing services. The way they handle cosigners varies greatly from lender to lender, so it is advisable to shop around. Your cosigner might be hesitant to sign a new loan given the problems you already have, but a lower rate or longer repayment term could help keep the payments manageable.

A Financial and Personal Issue

Falling behind on a loan with a cosigner is a lousy situation.

Your cosigner might feel betrayed or scared when they learn about your student loan struggles. They did you a favor, and because of that favor, they now face a difficult situation.

Acknowledge the reality of the situation. There usually isn’t an easy fix. However, the right mixture of honesty, patience, and hard work can make things much more manageable.

The post Can’t pay your student loans? Here is what you should tell your cosigner. appeared first on The Student Loan Sherpa.

While this terminology change is arguably a positive for consumers, it also creates some confusion. Co-borrower and cosigner sound very similar, yet there are significant differences between the two roles. However, these differences don’t really make sense in the context of student loans.

Confused yet?

After reading this short article, the entire situation will make much more sense.

The Traditional Difference Between a Co-Borrower and Cosigner

Both a co-borrower and a cosigner are legally responsible for repaying the debt they sign. However, the purposes behind co-borrowing and consigning are very different.

When a cosigner gets added to a loan, it is to help a borrower who cannot qualify for the loan independently. The cosigner exists entirely to help the primary borrower. The primary borrower has to repay the loan. If the primary borrower fails to repay the loan, the responsibly shifts to the cosigner.

In a traditional co-borrower situation, there is no primary borrower. Both borrowers benefit from the loan, and they repay the loan together. They also share ownership of the underlying asset of the loan. A classic example is a car purchase. If two people use a car jointly and share ownership, they may apply for an auto loan as co-borrowers.

Co-Borrowing Doesn’t Make Sense for Student Loans

Using the traditional definition of a co-borrower doesn’t work in the context of student debt.

With student loans, there is still a primary borrower. One person gets the knowledge and the degree. The other person receives no benefit. The other person on the loan exists only to help the primary borrower qualify.

A co-borrower on a student loan looks and sounds exactly like a cosigner.

To get to the bottom of this issue, I reached out directly to a student loan lender that uses the terms co-borrower and cosigner in their advertising materials. After some internal discussion, the lender explained that they used the terms interchangeably and that there was no difference.

Why a New Term is Better for Student Loans

To recap, a co-borrower and a cosigner are different jobs. However, for student loans, they are identical.

While the terminology distinction is confusing, shifting typical student loan language from cosigners to co-borrowers might be for the best.

In running a student loan site, I have frequent interactions with student loan borrowers. Many of these borrowers are cosigners who didn’t realize the commitment they were making when they signed for the loan. Students learn they need a cosigner, so they reach out to parents, friends, and family until they find someone to help qualify for the loan. People rarely read the full language of a student loan contract.

Calling someone a co-borrower might help consumers more readily understand their role. If you cosign a loan, you do it for the borrower. If you co-borrow a loan, you do it with the borrower. The term co-borrower implies a responsibility for the debt. If the average consumer thinks co-borrowing is a bigger commitment than consigning, lenders should use the term co-borrowing.

Additional clarity could help many future borrowers and their families.

Finding A Student Loan Co-Borrower

If you are looking for a co-borrower to get a student loan or to refinance a student loan, you need to find someone:

• creditworthy, and
• willing to sign the loan paperwork.

This guide to finding a student loan cosigner will also apply to finding a co-borrower.

Getting a Co-Borrower Released from a Student Loan

If you are a co-borrower or have a co-borrower who wants released from a loan, there are several ways to accomplish this task.

Many lenders may offer a “co-borrower release” to “creditworthy borrowers,” but this is often the most difficult way of securing a release. If a lender has two people legally responsible for a loan, they have minimal incentive to drop it down to one.

Fortunately, there are ways to get released from the loan without asking permission from the lender.

The post What is a Student Loan Co-Borrower? appeared first on The Student Loan Sherpa.

Unfortunately, a student loan cosigner dying can negatively affect the borrower, even if the borrower has never missed a payment.

The Big Danger: Auto-Default

An auto-default is a provision lenders sometimes write into student loan contracts (the promissory note). Under this provision, a lender can automatically place the loan into default status when a cosigner dies or declares bankruptcy. Lenders have used this provision to lay claims on the cosigner’s estate, even if the borrower never missed a payment.

Not surprisingly, many consumers found issues with this practice and filed complaints with the Consumer Financial Protection Bureau (CFPB). The CFPB shed some light on this industry practice. As a result, lenders like Sallie Mae and Wells Fargo promised to stop enforcing these provisions and to stop including them in new contracts.

Unfortunately, these provisions are still technically legal. As a result, some lenders may try to enforce or include them in their student loan contracts, despite the negative publicity it could generate. For borrowers, one of the better defenses against this practice is to file a complaint with the CFPB. Additionally, borrowers can try to generate some negative publicity for their lender. Losing a loved one and having a lender act like a loan shark is a compelling story that the media may want to tell.

Don’t Add Another Cosigner

We have heard from readers who were told by their lender that they needed to find a new cosigner. Despite what the lender may claim, there is no way they can force the addition of another cosigner to the loan.

For a borrower to willingly add a cosigner and get nothing in return from the lender would be a huge mistake. For starters, lenders cannot require borrowers to add a cosigner. Not every borrower has more than one cosigner available. The most a loan contract could do is require a borrower to seek out a cosigner. In the unlikely event that the loan contract requires the borrower to find a new cosigner, they should still never actually add a cosigner.

The conversation could go like this:

Borrower: The Bank requires me to attempt to find a new cosigner because grandma died.
Parent: Do I have to cosign for you?
Borrower: No. It is your decision. You cosigning wouldn’t help me in any way, but it would make you legally responsible for the loan. The only one who benefits is the bank. I’m just fulfilling my requirement to ask.
Parent: I will decline to cosign your loan.

Adding a cosigner after the death of the original cosigner will only benefit the lender and be to the detriment of the new cosigner. Unless you are facing an auto-default, there is no reason to do it.

Do I have to tell the lender?

One of the best ways to avoid any deceased cosigner issues is not telling the lender and hoping that the lender doesn’t find out about the cosigner’s death.

Here again, there is no benefit to the borrower to inform the lender of the death. The only reason a borrower should even consider this disclosure is if the loan contract explicitly requires it. The odds of such a clause being included and enforceable are low.

Avoiding These Issues

The best way to avoid any cosigner issues is never to have a cosigner.

If you already have a cosigner on the loan, you should explore getting them removed from the loan. There are a couple of different strategies that a borrower can use to release the cosigner from the loan.

Make a Plan for a Cosigner Release: Removing a cosigner from the loan can greatly benefit both the borrower and the cosigner. Learn about how the process works and the different ways to get the cosigner removed from the loan.

Additionally, borrowers and cosigners should seriously consider life insurance. Depending upon the loan terms, an inexpensive life insurance policy could provide the necessary protection.

Bottom Line: Don’t Let Student Loan Lenders Take Advantage of Your Greif

The passing of a cosigner shouldn’t have an impact on the borrower of a student loan. Unfortunately, some lenders have been known to engage in some shady tactics to make a few extra bucks. The good news is that, for most borrowers, this is a non-existent problem or one with an easy fix.

The post My Cosigner Died… What Happens to My Student Loan? appeared first on The Student Loan Sherpa.

Unfortunately, this common practice is not usually the best choice. There are two main reasons.

Reason #1: Getting Credit in the Future

Buying a house is often the biggest purchase couples make. To make sure they can afford their dream home, it’s smart financial planning is crucial. Surprisingly, student loans can have a significant impact on a borrower’s ability to qualify for a mortgage.

In theory, a couple’s ability to afford a home should not change whether or not they cosigned their spouse’s student loan. In reality, however, it matters.

This issue isn’t just about buying a house; it affects getting any kind of loan.

Imagine you’re buying a $25,000 car with your spouse. If both of you sign the car loan, that $25,000 shows up on both of your credit reports. When the time comes to apply for a mortgage or any other credit, lenders will look at your debt-to-income ratio. The monthly payment on that car loan will have a negative impact on your debt-to-income ratio. It will have the same consequence for your spouse.

Some lenders may try to tell you that they won’t double count your debts, but due to lending automation, that is a very tough promise to make. A computer using a fixed formula makes most credit decisions. These systems provide very little room for human input, and they are far from perfect. As a result, double counting of shared debt is a genuine problem.

Important Note: These cosigning issues apply to both new in-school student loans and refinanced loans.

Reason #2: Divorce

Thinking about divorce is the last thing on a married person’s mind, but with the high divorce rates, it’s a reality that needs to be factored into financial planning. Many couples choose to form a prenuptial agreement for this very reason.

Cosigned debt, particularly student loans, can become a huge mess if a couple splits. Here’s why:

Firstly, student loans are sticky; even with recent policy improvements, they complicate a bankruptcy, which can sometimes follow a divorce. This means that long after you’ve cleared other debts, student loans can still haunt you.

Secondly, your bank or lender doesn’t care about your personal drama. If you cosigned a loan with your spouse, and then you two split, you’re still responsible for that debt. A divorce doesn’t free you from your loan obligations. Legally, you’re stuck with the debt no matter how your relationship changes.

Thirdly, many don’t realize that prenuptial agreements or divorce court decisions don’t affect your dealings with your lender. Even if a divorce decree states your ex should pay off the student loan, you’re still liable as a cosigner. If your ex doesn’t pay, it’s your credit score that suffers. Sure, you can try to recoup your losses by taking your ex to court if you end up paying, but it’s a complicated and messy ordeal.

In summary, divorce courts can divide assets and debts, but they can’t change the names on a loan contract. If your former spouse doesn’t keep up with payments, the lender will look to you for money. You’re left with two choices: pay off the debt or risk damaging your credit. Either way, if you do pay, attempting to get that money back can be a complex and unpleasant process.

Alternatives to Cosigning Loans

Lenders often prefer loans to have a cosigner because it means there are two people legally responsible for paying back the debt, not just one.

The silver lining is that the student loan refinancing market is very competitive. Lenders understand that not everyone can or wants to have a cosigner.

To get around needing a cosigner, the key is to compare offers from multiple lenders. This site tracks over 20 lenders and recommends that borrowers check rates with between 5 to 10 lenders to make sure they’re getting the best rates possible.

Avoiding and/or Fixing a Mistake

If you are thinking about refinancing your student loans with your spouse, carefully consider your options. The risks are genuine, and they are significant. The potential reward, a slightly lower interest rate, hardly justifies the many possible negative consequences.

If you have already cosigned your spouse’s student loan debt, the good news is there are several strategies that can be used to remove cosigners from loans.

The post Tip for Married Couples: Don’t Cosign Loans appeared first on The Student Loan Sherpa.

I’ll also cover one shortcut that can eliminate the need for a policy.

The good news is that a little bit of planning can prevent a variety of student loan nightmares.

If the Borrower Dies: The Worse Case Scenario

The purpose of a student loan cosigner is to have a second person legally responsible for the student debt.

If the borrower doesn’t find a job or can’t make payments, the student loan bill becomes the cosigner’s responsibility.

When cosigners add their name to a loan, they often consider what they will do if the borrower falls behind. Cosigners usually have a close relationship with the borrower, and most feel confident that if a borrower struggles, it will be a temporary issue.

Unfortuantely, many cosigners don’t consider what happens if the borrower dies. In the eyes of some lenders, nothing changes. If the borrower is deceased, they cannot make payments, and repayment becomes the cosigner’s responsibility. President Joe Biden ran into this very issue when his son died.

This particular term varies from one lender to the next. When a lender holds the cosigner responsible for the debt, the consequences can be devastating.

In some cases, the cosigner becomes responsible for the monthly payments. In other cases, the full balance of the loan is due.

Important Note About Federal Loans: This particular issue does not apply to federal student loans. Federal loans do not have cosigners. Additionally, when the borrower dies, the remaining federal loan balance is forgiven.

If the Borrower Dies: The Second Worst Case Scenario

Suppose the borrower dies and the lender forgives the debt.

The loan contract may specify that the debt is forgiven if the borrower dies, or the lender may choose to cancel the debt. Both options are better than getting stuck with the bill.

Unfortunately, the cosigner may still have financial issues. The IRS may treat the forgiven debt as taxable income. Meaning if $100,000 gets forgiven, the cosigner is taxed as though they earned an extra $100k that year.

Recently, Congress passed temporary legislation to protect families from tax bills when student loan borrowers die. However, even with the new law, it is challenging to navigate the taxability of canceled debt.

Here again, family members can face massive tax bills if a loved one dies unexpectedly.

If the Cosigner Dies

The death of the primary borrower is not the only concern.

Some private student loans have provisions that make the entire student loan balance due in full if the cosigner dies. A study from the Consumer Financial Protection Bureau found that many private student loans had “Auto Default” provisions. An “Auto Default” provision may be triggered even if the borrower has been in repayment and not missed a single payment.

Life Insurance: Protection from the Unexpected

Most healthy young people don’t spend much time considering the possibility of their death.

A recent study found that 73% of borrowers don’t know what happens to their debt if they die.

Life insurance solves this potential problem for student loan borrowers and cosigners. For young and healthy borrowers, setting up a policy can be inexpensive and easy. If tragedy strikes, a life insurance policy protects the family left behind.

Who Should Pay for the Life Insurance Policy?

Ideally, there should be two policies—one to protect the borrower and one to protect the cosigner.

I’m of the opinion that the borrower should pay for both policies. Cosigners take on a tremendous amount of risk by signing for a student loan, and they gain nothing in return. A life insurance policy protects the cosigner. It is also an excellent way for borrowers to show gratitude for cosigning.

However, borrowers may not be in a position to afford a policy. They may choose not to get one. In that instance, it is the responsibility of the cosigner to protect their own interests and take out a policy. And yes, it is possible to take out a life insurance policy on someone else.

A Cheap and Safe Way to Skip the Life Insurance Option for Student Loan Cosigners

Most of the problems described in this article disappear if the cosigner is removed from the loan.

Many lenders offer cosigner release policies, but qualifying is difficult. Fortunately, there are several different ways to remove a cosigner from the loan. If the pursuit of a cosigner release is successful, borrowers and their cosigners are protected, and no life insurance is required.

The post When Student Loan Borrowers and Their Cosigners Need Life Insurance appeared first on The Student Loan Sherpa.

Most college students will need the help of a cosigner to get a private loan. However, selecting the wrong cosigner can cause future financial troubles and jeopardize a meaningful relationship.

Though there are hurdles to overcome, it is possible to find a good fit. For the students unable to locate a cosigner, there are ways to pay for school without a cosigner.

Finding A Good Cosigner for Private Student Loans

Before we jump into the different ways someone could find a student loan cosigner, we should first consider what to look for in a cosigner.

Ideally, a good cosigner would have the following qualifications:

• Good Credit Score and Debt-to-Income Ratio (DTI) – A cosigner must pass a credit check. If lenders consider a cosigner applicant to be a credit risk, they will deny the application. Additionally, the credit score and DTI of the cosigner can impact the interest rate offered by the lender. The better the cosigner’s credit profile, the better the interest rate.
• A Solid Relationship with the Borrower – Cosigning is a significant financial commitment. Discussing finances can be very personal to some people, but borrowers must discuss finances in detail with their cosigner.
• Long-Term Financial Security – If a potential cosigner is about to buy a new house or start a new business, they might not be in a position to add any extra debt to their credit report. An ideal cosigner won’t need to borrow money for many years.
• Able to Understand the Commitment – The impact of cosigning a student loan can be complicated. An elderly relative may not understand how cosigning a loan could affect them. Other family members may think you took advantage of your cosigner.
• A Calm, Relaxed Attitude – Cosigner/borrower relationships can be tricky, especially if the borrower has trouble finding a job after college. You don’t want a cosigner who will judge every purchase you make until the loan is repaid.

Don’t Forget Federal Student Loans: Cosigners are only required on private loans. Federal loans are almost always a better choice because of the extensive benefits and protections available to federal borrowers. Before asking anyone to cosign, make sure you have first maximized all federal options.

Parents Are Not the Only People to Consider as Cosigners

Parents – Parents are the most common choice as cosigners. If they can’t cosign, they could provide assistance by talking with other family members and family friends.

Aunts, Uncles, and Grandparents – Reaching out to the extended family may help. However, it is essential to remember that even for people with perfect credit, there is a limit to how much debt they can cosign. Grandparents may not want to cosign loans if they can’t do it for all the grandchildren. Your Aunts and Uncles may have children of their own and be unable to cosign.

Brothers and Sisters that have Finished School – Siblings that are out of school may be a surprisingly good option. They will understand the challenge of finding a cosigner. Depending upon where they are financially, they may be in a position to help.

Employers – Many employers have programs to pay for employee tuition. Guaranteeing a loan is less of a financial commitment. This approach may be a long shot, especially at bigger companies with a large bureaucracy. However, it is worth trying, especially if the employer directly benefits from the additional education.

Close Family Friends – Thus far, most suggestions have been family members. However, many people have friends that are as close, or closer, than their family. There is no requirement that a cosigner be a family member.

Have a Plan for Paying for School and Repaying the Debt

When you ask someone to cosign a loan, you are asking them to make a major financial commitment. Cosigners get nothing in return for taking on this risk.

As a potential borrower, you can put the cosigner at ease by having a detailed plan for handling the debt.

Your detailed plan should include the following:

• How much do you need to borrow for this year?
• Will you need to borrow more in future years?
• How much do you expect to earn after graduation?
• How long will it take to repay the student loans?
• What will you do if you can’t find a job?

One of the best tools for preparing for the cosigner discussion is the College Scorecard. The College Scorecard is a service of the Department of Education. It contains detailed information, sorted by school and major, included expected costs, starting salary, and average debt levels.

Be Honest About the Downsides to Cosigning

Students looking for a cosigner should be honest about the potential downsides to cosigning. If you ask someone to cosign, and they think they are being duped or misled, they are far less likely to cosign the loan.

The big risk for cosigners is that they get stuck making payments because the borrower fell behind.

However, there are additional risks. Cosigners will usually see a brief drop in their credit score from the initial application, but further negative consequences are possible.

Another major issue with cosigning is the impact on the cosigner’s Debt-to-Income Ratio or DTI. Even though the borrower has the primary responsibility to make payments, the loan still appears on the cosigner’s credit report. This will hurt the cosigner’s DTI, potentially making it harder to qualify for a mortgage.

Changes to the cosigner’s DTI will also make it harder to cosign future loans. This problem may be especially severe for large families, but it should also be considered for first-year students who will need to borrow for several more years.

Hiring a Cosigner or Finding a Cosigner Online

This has been a growing trend in recent years. It is also incredibly stupid.

As a cosigner, it is a terrible decision to cosign the loan of a stranger. If they decide to skip town without making payments, you are on the hook for the full balance of the loan. If someone has resorted to finding a cosigner online, it means lenders view them as too much of a risk to give them a loan AND nobody in their life was willing to cosign the loan. Getting paid to cosign a stranger’s loan is extremely risky.

As a borrower, you might be ok with someone else taking on this risk. Because cosigning a stranger’s loan is such a dumb decision, borrowers should be highly suspect of anyone willing to provide this “service.” Is it a scam? What happens if the cosigner doesn’t get approved? What happens if the cosigner cancels the loan after they have been paid?

Paid cosigners are a bad idea.

The only reason such a concept even exists is that some people are truly desperate. Such desperation can lead to awful decisions. Don’t make this particular mistake.

Cosigner Release Options

Lenders like to advertise that they have generous cosigner release programs.

They may claim that cosigners can be released from the loan after as little as 12 months of on-time payments from the borrower.

Unfortunately, securing a cosigner release can be extremely difficult. All cosigner release programs require the borrower to pass a credit check before the release is approved.

Lenders have little incentive to grant the borrower a release. With a cosigner, they have two people legally responsible for the debt. If they approve the release application, only one person is legally responsible. Thus, lenders have a huge incentive to look for any reason to deny the application. A report from the Consumer Financial Protection Bureau found that 90% of cosigner release applications were rejected.

While there are better alternatives to getting a cosigner release, it is a mistake to assume that a release will be granted before the loan is paid in full.

How to Thank Your Cosigner

If you are lucky enough to find a cosigner, there are several ways to say thanks.

The best way to thank a cosigner is to make sure you never miss a payment. Cosigners don’t want to get calls from lenders about missed payments. Don’t make them worry that they might have to take over the monthly bill.

If you are going to miss a payment, let your cosigner know in advance. They may have suggestions to help. As the borrower, you don’t want your cosigner getting a surprise call from the lender. Here again, transparency is key.

Think about a life insurance policy. Not all student loans are automatically discharged if the borrower dies. If you pass unexpectedly, you don’t want to leave your cosigner with your student debt. For a healthy young person, a life insurance policy is cheap. Name your cosigner as a beneficiary for an amount larger than the balance of the student loan. Be sure to explain to your cosigner why the policy is in place so that there are no surprises.

Finally, just say thanks to your cosigner. If someone is cosigning a loan for you, it is because they care. Cosigning has no benefit to the cosigner and comes with significant risk. Cosigning is a selfless act. Let your cosigner know that you appreciate their sacrifice.

Finding Cosigners for Student Loan Refinancing

Thus far, we have focused on finding a cosigner for an in-school private student loan. However, this is not the only circumstance where a cosigner enters the equation.

In a student loan refinance, borrowers may seek the help of a cosigner to get approved or to get a lower interest rate.

There are two aspects of cosigning on a refinance loan that are different from cosigning on an in-school loan.

1. Help from a cosigner is not essential to paying for school. At the point somebody is refinancing their loans, they have finished college. Refinancing is done to lower interest rates and make payments more affordable. It is less of a necessity than finding an in-school loan in order to finish a degree.
2. There is a natural cosigner to refinance loans. The best candidate to cosign a refinance loan is the cosigner on the original loan. By refinancing, a borrower can secure better loan terms and increase the likelihood that they repay the loan in full. This change is to the benefit of the original cosigner.

What to do if you Can’t Find a Student Loan Cosigner

No cosigner loans are a popular subject, but they don’t really exist. If you are a student without a job and have little to no credit history, you will need a cosigner.

I’d offer two suggestions for people who can’t find a cosigner.

First, make sure you are not overspending on your education. If your school can’t help you find the money you need to attend between scholarships, grants, and federal aid, the price of admission might not be worth it. Nobody wants to think of this possibility, but cosigner desperation could be a red flag that you are at the wrong school.

Second, consider looking into an Income-Share Agreement or ISA. ISA companies will provide students the funds they need for college in exchange for a portion of the student’s future income. Stride Funding is perhaps the best know ISA company. This site has previously reviewed Stride Funding and compared ISAs to Student Loans.

The post How to Find a Student Loan Cosigner appeared first on The Student Loan Sherpa.

At its core, cosigning is a selfless decision. The cosigner receives no benefit, takes on tremendous risk, and helps a loved one afford college.

Sadly, the seemingly noble decision to cosign is often a mistake for both the cosigner and the borrower.

The Obvious Problem: Getting Stuck Making Payments

Some cosigners think they are just providing a recommendation or endorsement of the borrower as being a responsible person.

In reality, they are legally committing themselves to pay off the loan if the borrower is unable.

There is an endless list of reasons the cosigner could get stuck making payments.

Cosigners could face a major financial hardship if the borrower:

• can’t find a job,
• doesn’t earn enough to make payments,
• chooses to stop making payments,
• gets sick, or
• dies.

What Happens to Cosigned Loans if the Borrower Dies? In some cases, the lender will forgive the remaining debt when a primary borrower dies. Others will require the cosigner to take over the monthly payments. Some loans even have a clause requiring the balance paid in full upon the borrower’s death. Cosigners should investigate loan terms and get a life insurance policy when necessary.

Credit Score Consequences 

Cosigning is often a mistake because of the damage it can do to a credit report.

To become a cosigner, the lender will run a credit check. This hard credit pull can hurt the cosigner’s credit score. While the drop in score is usually small and doesn’t last long, it can cause an issue for cosigners trying to get a mortgage.

However, the big credit score risk comes in the form of late payments.

A single missed payment can last on your credit report for seven years. This delinquency will appear on both the borrowers and the cosigner’s credit report.

A missed payment can happen for any number of reasons. The borrower may think they are signed up for automatic payments, but there is a mistake in enrollment. The loan might get sold from one lender to another, and the borrower misses a payment because they didn’t know where to send it.

Usually, both the borrower and the cosigner receive notice and an opportunity to make things right before the negative reporting happens. However, this isn’t guaranteed.

Tension with Family or Friends

A cosigner depends upon the borrower making responsible financial decisions.

Lenders like having cosigners because it gives them an extra debt collector. If the borrower struggles, the cosigner will have a huge incentive to get the borrower to make payments.

Imagine being a cosigner and seeing the borrower buy a new car but then missing a student loan payment. Imagine being a borrower and having a cosigner ask personal financial questions to ensure you can keep up on payments.

The borrower/cosigner relationship can fall apart when money enters the equation. At the point the borrower stops making payments, things can get really ugly.

Debt-to-Income Issues for Cosigners

Cosigning a student loan is a mistake because of the many ways things can go wrong.

However, cosigning can also be a mistake when everything goes right.

Cosigned student loans show up on the cosigner’s credit report, even when the borrower is making payments. The problem with the loan showing up on a credit report is that it impacts the cosigner’s debt-to-income ratio.

There are ways to work around this particular issue in some circumstances. However, for anyone looking to buy a house, cosigning student loans can be a major problem.

Cosigner Release Programs: Many lenders like Navient offer a cosigner release, but actually qualifying for the release can be a major challenge. Those who have already cosigned student loans should investigate how to, directly and indirectly, get released from the student loan.

Cosigning a Student Loan is a Mistake When Federal Loans are Available

Cosigning a student loan is typically a mistake for reasons that apply to the cosigner.

When federal loans are available, getting a cosigner is a huge mistake for the borrower.

The analysis here is fairly simple. Cosigning a student loan only comes up with private student loans. Federal student loans are much better loans, and they don’t require a cosigner.

Before cosigning any student loan, make sure the federal options have been exhausted.

The One Time Cosigning a Student Loan Isn’t a Mistake

Sometimes cosigning a loan seems like the only option. Sometimes people don’t realize it is a mistake until it has already happened.

Borrowers who have existing student loans may look to refinance their loans to get lower monthly payments or a better interest rate. If these borrowers cannot refinance the loan without a cosigner, it might be smart for existing cosigners to help again.

If a cosigner is already the debt, and refinancing helps the borrower keep up with payments, cosigning on a refinance loan could be a smart decision.

The post Five Reasons Cosigning a Student Loan is a Mistake and One Exception appeared first on The Student Loan Sherpa.