Private student loans are a financing tool for students who need to bridge the gap when federal Direct loans don't cover the full cost of college. But since interest rates are partly based on a borrower's credit score, rising college students may not have established a good enough credit history yet to qualify for the lowest rates possible.
That's why the vast majority of undergraduates enlist the help of a creditworthy cosigner when borrowing private student loans to pay for school, according to a 2018 Credible analysis. Borrowers with a cosigner qualify for interest rates at about 2.36 percentage points lower than those without cosigners, which can translate to significant cost savings over the life of the loan.
Keep reading to learn how a cosigner can save you money on your private student loans. And if you're currently shopping for student loans, you can compare student loan rates for free on Credible without impacting your credit score.
A cosigner can save you thousands due to lower student loan rates
Whereas undergraduate Direct loans have the same fixed interest rates for all borrowers, private student loan interest rates vary depending on a number of factors, including:
- The borrower's credit score
- The loan amount
- The loan repayment term
- The type of loan (fixed rate or variable rate)
Rising college students who don't have an established history must rely on the help of a cosigner like a parent or a guardian if they want to qualify for private student loans at a low rate.
Borrowers with credit scores below 620 were able to lower their rate by an average of 4 percentage points by adding a cosigner, according to Credible's analysis. Those with credit scores in the 620 to 719 range received a 3-point interest rate reduction.
Even creditworthy applicants with a 700 credit score will see lower rates if they get a cosigner with better credit to sign off on the loan.
Over time, a lower rate can save student loan borrowers thousands of dollars. For example, a borrower with good credit who takes out a $20,000, 10-year student loan at a 7.95% fixed rate could save more than $4,000 on total interest paid if they could qualify for a 4.44% rate with an excellent-credit cosigner.
See how much you could save by comparing private student loan rates from multiple lenders on Credible. You can use a student loan payment calculator to see how a lower interest rate can impact your repayment plan over time.
How to find the right cosigner for your student loans
It's more common for private student loan borrowers to need a cosigner than you may think. About 92% of undergraduate student loans are cosigned, Credible's analysis found.
About three-quarters of undergraduates who add a cosigner to their student loans get help from a parent. But parents may not be your only source of financial support. Here's the breakdown of who cosigns private student loans on Credible's marketplace:
- Parent: 72.5%
- Relative: 8.9%
- Spouse: 7.5%
- Friend: 3.1%
- Sibling: 2.7%
- Guardian: 2.7%
- Employer: 0.2%
The most important thing to look for in a cosigner (besides trust) is the creditworthiness of the applicant. The higher their credit score is, the lower your potential student loan rates will be.
Cosigning on a student loan is a significant financial commitment since a cosigner shares equal responsibility for repaying the loan. Your cosigner's debt-to-income ratio will increase and their credit will be impacted when you apply. And if you default on the loan, your cosigner will also be negatively impacted.
When asking a creditworthy applicant to cosign on your private student loans, remember that they're putting their own personal credit on the line for the benefit of your education.
Learn more about the eligibility criteria for cosigning a private student loan on Credible. You can get in touch with an experienced loan officer who can help you make the right decision when it comes to financing your education.
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