Imagine someone randomly asking you on the street to borrow $500. Do you think you’d oblige? Would it help if someone they knew could vouch for them? If they could guarantee that you’d get back that money this random person wanted to borrow?
When applying for private student loans (and some federal student loans), a lender might feel this way about a potential borrower. But, if that hopeful borrower can have someone vouch for them, in this case a cosigner, that might bolster their loan application.
Having a cosigner on a student loan is a little like a letter of recommendation to get into college. A cosigner can reassure the bank or lender that the applicant is capable of repaying the loan. Their financial history serves as an endorsement for the primary applicant’s financial inexperience.
But a cosigner is not always required for student loans, such as with most federal student loans. Depending on a student’s financial history, employment, and what type of loans they’re applying for, the likelihood of requiring a cosigner will vary.
Before we dive in, we want to point out that—as with any finance-, bankruptcy-, tax- or credit-related tips—your mileage may vary. The views in this article are very general in nature, and it’s likely each person’s situation will have all sorts of variables we can’t account for. Never rely on a blog post like this one for financial, legal, or tax decisions.
What Is a Student Loan Cosigner?
A cosigner is a person who agrees to repay the loan if a borrower defaults or is otherwise unable to pay their debt. A cosigner on a student loan could mean the opportunity to borrow at a lower interest rate, depending on the cosigner’s financial and credit history.
When a cosigner takes on a student loan with the borrower, they’re assuming equal responsibility to repay the loan.
Any negative actions on the loan, such as a late payment or defaulting, could harm the borrower’s credit, and if the cosigner becomes the primary after a default and then also defaults, it could harm their credit as well.
Read on and answer the questions below to see what factors can determine whether a student might need a cosigner on their private student loan.
Where to Begin?
Before deciding whether a student might need a cosigner on a loan, the first step is to fill out the Free Application Federal Student Aid (FAFSA®) to determine the amount that might not be covered by federal aid (including grants and scholarships).
Then, once all other options are exhausted, students could possibly look into private student loans and consider a cosigner.
What Type of Student Loans Are Being Considered?
The type of loans a person is applying for may affect their need for a cosigner.
Federal Student Loans
Most, but not all, federal loans don’t require a cosigner. Further, borrowers don’t need a credit check to be considered for most federal loans. If a student is applying for any of the following, they won’t need a cosigner:
• Direct Subsidized Loans
• Direct Unsubsidized Loans
• Direct Consolidation Loans
However, if a student is applying for a Direct PLUS Loan, they may need an endorser for the same reasons they may need a cosigner for a private student loan: if their credit history and other financial factors are lacking.
A Direct PLUS Loan can help graduate students and parents of undergraduate students pay for the entire cost of school attendance, minus any other financial aid. Direct PLUS Loans are the only federal student loans that look at an applicant’s credit history, thus the potential need for an endorser.
An endorser is the equivalent of a cosigner—they agree to repay the Direct PLUS Loan if the borrower defaults or is delinquent on payments.
Private Student Loans
If an applicant doesn’t meet the lending requirements on their own, they might need a cosigner to obtain any private student loan. To qualify for a private student loan, applicants typically have to check more boxes regarding financial history than they would for a federal student loan.
According to a report by MeasureOne, 91% of private undergraduate student loans and 63% of private graduate student loans originated in 2019 had a cosigner.
Based on those numbers, when applying for a private student loan, a private student loan borrower is more likely to require a cosigner than not.
Both Federal and Private Student Loans
Once a student has the results from the FAFSA application, they can determine if federal student loans will cover the cost of their education or if they need to supplement the amount with a private student loan.
While the borrower might not need a cosigner for federal loans, they might require one for private student loans they might take out.
Is the Student an Undergraduate or Graduate Student?
The necessity of a cosigner may vary depending on whether a person is applying for graduate or undergraduate private student loans.
Undergraduates are generally more likely to need a cosigner on their private student loans. That’s because undergraduates typically haven’t established a lengthy credit history.
For example, if a student applicant hasn’t had accounts open for long, lenders might perceive them to be someone with inadequate credit history.
That’s because they don’t have a track record, good or bad, of repaying loans or other debts on time. In addition, undergrads might not have a steady income, which can also affect whether they are approved for a loan without a cosigner.
The type of schooling a person is pursuing won’t have an impact on the need for a cosigner. However, a person’s credit history and income will still factor into the decision.
What About Credit Score?
Most private lenders will look at an applicant’s credit score (among other factors) to determine eligibility. Having a lower credit score may make it harder to get a loan without a cosigner.
FICO® Scores (the most common credit scores used by lenders and financial institutions) range between 300 and 850.
If a person wants to simply check their score, many websites offer free credit scores or credit score monitoring (just be sure to read terms and conditions carefully).
If a person wants to see their full credit report, they can get a free credit report annually from AnnualCreditReport.com. It is important to note that this is not the only site where someone can request a free credit report. For example, they can get their credit report directly through the credit bureaus or on other online sites.
With a number in hand, it might be easier for an applicant to anticipate if they need a cosigner on their private student loan.
If a student is just finishing up high school, for example, they probably don’t have much of a credit history. Heck, they likely don’t even have a credit card, since that requires being 18 and having a steady income. But a lack of credit history might mean the student will need a cosigner when applying for a private student loan.
If the potential borrower is a graduate student with a less-than-stellar credit history, that might also mean they might need a cosigner. However, if a graduate student has spent their undergrad years building a positive credit history, they might have a score that would be favorable for a private student loan with no cosigner.
Ultimately, it’s up to each individual lender to consider the credit score and other financial factors before approving a loan, and every lender has different criteria.
What Is the Student’s Employment Status?
Consistent income is also considered when applying for a private student loan. The more income a person has, the rule of thumb goes, the more money they have to pay back debts, making them less likely to need a cosigner.
Employed Full Time
Generally, if a person is employed full time at a salaried job, it shows lenders they have the capability to repay the loan they’re borrowing. A person employed full-time with a salary will likely not need a cosigner . However, requirements at each lender varies.
It’s more likely than not that a person working part-time may still require a cosigner on a private student loan. However, the applicant’s debt-to-income ratio will still come into play—that is, how much debt a person owes (credit cards, rent, other bills) divided by the income they earn before taxes and other deductions.
Of course, all lender requirements vary, but significant, consistent income can factor into whether the applicant will still need a cosigner.
Only a Student (Not Employed)
If an applicant has no employment or income to speak of, lenders have no way to ensure that they can repay the loan.
That’s one reason a cosigner may be required. Even if students intend to have a job after college, lenders might not be willing to take that risk. Many private student loans require borrowers to make payments while they are still enrolled in school.
With a cosigner, applicants can show there’s an income stream to pay back these loans.
Has the Student Declared Bankruptcy?
Lenders can and do consider all aspects of a person’s financial history before granting a loan, bankruptcy included. Declaring bankruptcy does have an effect on a person’s credit history, thus it typically plays a part in private student loan eligibility.
If a person hasn’t declared bankruptcy, they won’t have the mark on their credit report, and it won’t factor into whether they need a cosigner.
Declaring bankruptcy negatively affects a person’s credit score, which private lenders pay close attention to with a loan application. A bankruptcy filing can stay on a person’s credit history for a decade.
Bankruptcy filings can affect a credit score in a number of ways, and depending on how long ago it took place, the effects on a person’s score will vary.
However, with a low enough score, the applicant may need a cosigner to qualify for a private student loan for rates and terms they’d prefer.
How Long Is the Student’s Credit History?
How long a person’s had a credit card or various forms of debt gives lenders a better sense of their ability to pay on time, or ability to pay off debt in full. The length of a person’s credit history makes up about 15% of their FICO® Score.
Length of credit history is determined by Average Age of Accounts (AAoA). Lenders take the lifespan of a person’s accounts and divide by the number of accounts that person holds. A potential borrower can determine this number by figuring out how long they’ve had each account in their credit history, then dividing by the number of accounts.
If, say, a student has had a car loan for two years, a credit card for four years, and a second credit card for three years, the math to determine their AAoA is: (2+4+3) ፥ 3 = 3.
The real sweet spot for credit history comes at the seven-year mark. From that point, early negative marks on account might’ve faded away. It shows lenders that a borrower can pay loans and maintain accounts over time.
So the hypothetical borrower with an AAoA of three might need a cosigner, or they might not. Ultimately, other factors would come into play and it would be up to the lender.
Has the Student Defaulted on a Loan?
Defaulting on a loan translates into repeatedly missing monthly payments. Terms of every loan are different, but after a period of nonpayment, the loan enters default.
Defaulting on a loan stays with a person’s credit history for at least seven years and typically negatively affects their credit score.
If a person has defaulted on a previous loan, they’ll likely need a cosigner on their student loan to potentially bolster their lendability.
If a person hasn’t defaulted on a loan, then it won’t factor into a decision on whether a private lender will require a cosigner.
Has the Student Ever Missed a Payment?
Similar to defaulting on a loan, on-time payments each month shows lenders that a person is a responsible borrower.
Missing a payment or two negatively impacts a person’s eligibility for a loan consistently missing monthly payments and racking up late fees can tank a person’s FICO® Score and financial history.
As we mentioned above, payment history is the most heavily weighted item when calculating a FICO® Score, and a person can pay dearly for it.
Consistently missing payments that have affected a person’s FICO® Score might cause a potential lender to require a cosigner. It could also cause concern for a potential cosigner, so students might want to keep that in mind.
A solid history of on-time payments shows a lender that a person is a responsible candidate for a loan and might not need a cosigner.
Choosing a Cosigner
As stated near the beginning of this post, the majority of private student loan borrowers have a cosigner. But not all cosigners are built the same, and choosing the right person to cosign a loan could be as important as the terms of the loan itself.
A cosigner should not only have a strong financial history, but also a strong relationship with the applicant. A cosigner might be a parent or blood relation, but Sallie Mae reports that nearly 27% of cosigners on student loans are someone other than a parent.
A cosigner ideally has a stable financial history and a relationship to the applicant where they feel comfortable discussing money. After all, the cosigner will become obligated to pay the loan should the applicant default.
Asking Someone to Be a Cosigner
There’s a common misconception that cosigning on a loan is as easy as signing a contract, but it actually means more than that. When a person asks someone to be their cosigner, they shouldn’t shy away from discussing the challenging topic.
It may make sense to talk about worst-case scenarios with a cosigner, let them know it would be their responsibility to take on the payments if the borrower defaults. Discuss how the borrower could repay the cosigner in the event that the borrower can’t make payments.
Risks of Cosigning
Beyond the worst-case-scenario discussion, cosigners should know the additional risks they take on when cosigning a student loan:
• Credit score. Cosigning a loan will affect a person’s credit score, since they’re taking on the debt as well. Even if the borrower makes on-time payments and doesn’t default, the cosigner will see a change in their credit score by taking on the additional debt, and it could even benefit their score.
• Liability. If the borrower defaults on the loan, it becomes the cosigner’s responsibility to pay for it. A lender can come to collect from the cosigner, seizing assets and garnishing paychecks to cover missed payments.
However, the cosigner doesn’t need to stay tied to the loan forever. Many private student loans have a cosigner release policy in place. After a duration of on-time payments and additional paperwork, a lender may release the cosigner from the loan, leaving the borrower on their own.
It might sound easy, but a cosigner release isn’t a guarantee. Nearly 90% of cosigner release applications are rejected by the lender.
Private Student Loan Requirements Vary
Like every college application, each loan application is a little different. Certain aspects of a person’s credit history or employment might make them more compelling to a lender.
Other elements, like late payments or a limited credit history, might make a person less compelling to lend to.
Adding a cosigner to a private student loan is fairly common and can improve a person’s chance of approval, sometimes even with a lower interest rate than if they applied on their own. With a reliable cosigner in place, the student loan approval process might ease a student’s worry.
If a student has exhausted all of their federal student loan options, private student loans could be a good option to look into.
SoFi offers private student loans with no origination fees, no late fees, and no insufficient fund fees. Plus, SoFi offers flexible repayment options to help students find the loan that fits their budget.
Learn more about private student loans with SoFi.
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