How to Make Cosigning a Student Loan a Breeze
Use the loan application process as a learning experience.
A college education is a valuable asset that can pay dividends for a lifetime, but paying for the cost of college alone can be a challenge.
If you want to help a family member get a college education, cosigning a loan could be the best way to do it—and could help put them on the path to better personal finance and career success.
Parents, guardians, or other relatives may want to cosign a loan for a loved one for any number of reasons. If you have decided to act as a cosigner, this article will help you and the primary borrower get through the loan application process quickly and easily.
Know the Basics
Sometimes a primary borrower’s income or credit history is not strong enough for a lender to approve a loan.
This isn’t a bad thing—students about to enter college simply haven’t had the opportunity to build a credit history or savings, so they may not qualify as primary borrowers. In such cases, the lender may ask the primary borrower to designate a cosigner.
Lenders treat cosigners like backup plans for loans. Both the primary borrower and cosigner are legally responsible for the loan, but the cosigner may never have to pay a cent as long as the primary borrower stays current on payments.
Prepare to verify your income
A cosigner must be able to verify his or her income. That way, the lender will know the cosigner can make loan payments if the primary borrower becomes unable to do so.
Typically, to verify your income as a cosigner, you will need to provide your most recent tax return and several months’ worth of recent pay stubs. Here are some tips to keep in mind:
- Cosigners who file their own taxes using online or desktop-based tax preparation programs can simply download past tax returns as PDF files and send them directly to their lenders.
- Some lenders may ask for more than one year’s worth of tax returns, particularly if the cosigner in question has undergone a major shift in income over the last few years.
Cosigner requirements can vary from lender to lender, so it is important to review your specific lender’s requirements to make sure you don’t miss anything.
Prepare to verify your identity
Banks and other lenders are required by law to obtain detailed information about their customers’ identities. This information allows them to ensure transactions are secure, safe, and legitimate.
If you are acting as a cosigner, you can count on submitting at least one form of government-issued photo ID. Commonly accepted forms of ID include:
- Driver’s license
- Passport
- Military ID
- TSA Known Traveler ID (from Global Entry)
Credit cards or student IDs are accepted as secondary forms of ID in some cases, but they typically can’t serve as replacements for one of the primary forms of ID listed above. That said, if you have trouble coming up with the required primary ID, a secondary ID is worth having on hand.
Lenders may also ask you to verify your address, so be prepared to show them a utility bill, a bank statement, or a similar financial or legal document that shows your name and residential address.
Prepare to verify your assets
Finally, the lender will check your credit history, so be prepared to provide your Social Security number so they can access the information.
To complete the verification process, you may also be asked for bank, investment, and other financial statements that show your current assets and liabilities. This helps the lender better understand your financial situation prior to their decision.
An important focus area when reviewing a cosigner’s finances is the debt-to-income ratio. If a cosigner his paying back loans already, the lender may be reluctant to allow them to act as a backup for on this student loan.
In most cases, lenders will request statements for bank accounts, investment accounts, and any other financial assets from the most recent month or two. Also, if you have made any unusually large deposits or other transactions, the lender may request documentation to verify the source of the funds.
Don’t forget the primary borrower’s identity
A cosigner on a loan is legally responsible for repayment just like the primary borrower, but a strong cosigner alone is not a substitute for verification of the primary borrower’s eligibility.
The lender’s decision is based on a detailed review of both the primary borrower’s finances and the cosigner’s ability to fill gaps where the primary borrower may have weaknesses.
As a result, the primary borrower should be ready to provide identity verification and financial details prior to loan approval. Primary borrowers should also plan to submit tax returns and other financial information, regardless of income or assets.
Use the loan application process as a learning experience
Parents and guardians have a unique opportunity to support their children as they move away to attend college. Helping to secure college financing can also teach young people valuable financial lessons.
The loan process can serve as a lifelong lesson for your child. Here are some important topics to cover with the primary borrower before you enter into a loan agreement:
- Make sure your primary loan applicant understands exactly what they are signing.
- Discuss with them what accepting student loan financing means for their future.
- Make sure they understand not only their responsibility to repay the loan, but also the ramifications of non-repayment for both of you.
- Explain how loans, interest, amortization, monthly payments, and credit scores work.
- Discuss how this valuable financial knowledge can help them someday when they want to buy a new car, take out a home mortgage, or wonder whether they should put a vacation on a credit card.
Taking the time as a cosigner to prepare the loan application will help the primary borrower absorb these important money lessons, and will make the loan application process quick and simple. With the right preparation, loan approval will be a breeze!