How to help safeguard your student loan cosigners

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Student loan debt is largely viewed as a problem for young workers and graduates, but there’s another group impacted by student loans that doesn’t share the same spotlight. Many forget that private student loans pose significant risks to cosigners, most often parents.

Every year, there are roughly 1.4 million college students with outstanding private student loan debt, collectively owing $102 billion to private lenders and banks. Roughly 90 percent of private student loans are cosigned – over $90 billion in student debt, according to LendEDU.

If someone has co-signed your student loans, they face significant risk that doesn’t stop until the loan is paid off. Thankfully, there are ways to mitigate that risk and help protect your own credit.

How is a student loan cosigner at risk?

First, why are there so many private student loan cosigners? Private lenders base approval on creditworthiness instead of financial need. Since many college students don’t have solid credit, they need a cosigner for a successful application.

Cosigners agree to be held responsible for paying back a loan if the borrower defaults. This could cause serious financial strain for a cosigner. Keep in mind that private student loans have higher interest rates compared to federal loans and less forgiving repayment terms.

If payments aren’t made, the cosigner’s credit may decline as well. This can have a lasting effect. It may hurt the cosigner’s ability to get credit later and more.

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3 ways to reduce liability as a cosigner

There are several ways to mitigate the risks of cosigning a student loan:

Term life insurance

The payoff from a term life insurance policy can pay off a cosigned loan if the borrower passes away. Term life policies offer coverage term options, typically 10, 15, 20 or 30 years, so a borrower can choose an optimal coverage term when purchasing the policy to last for the duration of the loan repayment term. If the unthinkable happens, the proceeds from the term life insurance policy can be put toward the loan, and if the death benefit is enough, might be to pay off the loan entirely, which is why a policyholder will want to choose a coverage amount taking into consideration of the amount of the loan. Term life plans are flexible and relatively inexpensive, making them a cost-effective option for this purpose.

Cosigner release via student loan refinancing

Private student loan borrowers are able to release cosigners through student loan refinancing. When you refinance student loans, a new loan is taken out from a private bank or lender. This loan pays off the old loan with the cosigner; the borrower is left with a new loan, interest rate, repayment term, and no cosigner. This is a fairly straightforward and simple way to remove a cosigner. The main barrier is eligibility criteria. Applicants need high income and great-to-excellent credit in order to qualify for student loan refinancing.

Cosigner release form

Some lenders offer a cosigner release form after a certain number of on-time payments. In other words, borrowers can prove their creditworthiness by keeping the student loan account in good standing. Contact the lender to find out how many payments need to be made. If you need help writing an email, there are free templates offered by the Consumer Financial Protection Bureau.

What you can do to protect your student loan cosigners

Cosigners can help students get private student loans. With this help, they can realize their dreams of a college education – all without credit history. However, cosigners should think twice about signing on that dotted line. You could potentially be exposing your finances and credit.

Luckily, it’s not the end of the world if you cosign a student loan. Whether it’s a life insurance policy, release form or student loan refinancing, there are steps you can take to minimize financial risk to cosigners. Don’t forget about these if you end up cosigning for a college student.

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Andrew Rombach is a content associate for LendEDU – a website that helps consumers and small business owners with their finances.

Sponsored by Haven Life Insurance Agency. The opinions expressed in this article are the author’s own. Haven Life offers this as educational information only. Haven Life does not endorse LendEDU or offer the products, services and/or strategies discussed here.

Real Rate is based on your application and third party data obtained during underwriting.

Haven Term is a Term Life Insurance Policy (DTC 042017 [OK1] and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. Policy and rider form numbers and features may vary by state and may not be available in all states. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Our Agency license number in California is OK71922 and in Arkansas, 100139527.

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