How Student Loan Co-signing Works

Why You May Need a Co-signer

If you're a prospective college student, there are myriad reasons why you might need a co-signer. Even if you have excellent credit -- which is highly unlikely, as most incoming college freshmen simply haven't had enough time or financial experience to build up creditworthiness -- you still might want a co-signer so you can get a lower interest rate.

In a lender's eyes, a co-signer adds legitimacy and lessens the risk of your loan. After all, banks are in business to make money, so adding another person (preferably someone older and with a decent credit history) to fall back on in case you default greatly increases the chances that banks will see a return on their investment -- namely, you. Therefore, they can afford to give you a lower rate because they're more certain they'll be repaid. A drop of a few percentage points will save you thousands of dollars over the life of the loan.

So, who could help finance your future? If you're fresh out of high school, your parents are always a safe bet, but you have to be careful. Times are tough, and if mom and dad have a less-than-perfect credit history, you'll probably want to look somewhere else. Adding a co-signer who is statistically unlikely to pay will only hurt your cause, not help it. If your folks are out, try pleading your case to a more financially stable relative or even a trustworthy friend. At the end of the day, it doesn't matter to the bank who your co-signer is. As long as you get a reliable person with a good credit history to sign on to your debt, you should be OK.

However, you're not going to convince any old Joe Schmo to help finance your college education. It's a huge responsibility, even if you never miss a payment. Your co-signer is accepting complete liability of your loan; as a result, until you pay off the debt, it will limit his or her borrowing potential and will probably result in higher interest rates on other loans and purchases made on credit. If you have a financially stable older brother, for example, who plans on buying a house or a pricey car in the near future, he'll probably be hesitant about taking on this expensive burden, even if he trusts you to repay it.