Private student loans have become a popular method of paying for school, with around 1.1 million undergraduates borrowing from private lenders in the 2015 to 2016 school year according to the Institute for College Access & Success.
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However, many of those who borrow from private lenders aren't able to qualify for loans on their own as they lack the income or credit history to qualify. In fact, one private student loan lender -- College Ave Student Loans -- indicated as many as 96% of private loans for undergrads are cosigned.
If you're considering private loans to help fund your education, or if you're thinking about becoming a cosigner for someone you love, there are three major benefits of taking out private student loans with a cosigner.
1. Taking out a private student loan helps build credit
Your credit score depends on a number of factors, including payment history and having a mix of different kinds of credit.
When you take out private student loans, they show up as an installment loan, while credit cards are revolving debt. That means these loans can diversify your credit history as you show lenders you can pay back loans with fixed monthly payments. You'll also build a record of on-time payments as long as you're responsible in paying your lender on time -- and payment history is the most important component of your credit score.
Private loans show up on both the primary borrower's credit record and the cosigner's credit history, so both parties get the credit-building benefits these loans offer. If you're interested in this perk, consider using Credible's free online tools to see what kind of student loan rates are being offered today.
2. You can obtain a lower interest rate on private student loans
Cosigners with better credit can make it easier to qualify for private student loans, which means that you may have a choice of different lenders when you otherwise might not get approved at all or may be limited in who you can borrow from.
When a cosigner agrees to share responsibility for the loan, this can also make it possible for the primary borrower to get a lower interest rate. This can help student borrowers to save, or parents can choose to take out a loan in their own names as well (either with or without a cosigner).
In many cases, the interest rate on a cosigned private student loan is lower than the rate on a Parent PLUS Loan. Private loans also don't typically charge an origination fee, while the up-front fee for Parent PLUS Loans can be relatively high. It may be more affordable for parents to cosign loans for their kids (or get a loan themselves, either with or without a cosigner) if they want to help them fund their education, rather than getting a PLUS Loan in their own name.
To see what you'd pay on a private student loan, either with or without a cosigner, you can visit Credible today to view a rates table that allows you to compare fixed and variable rates from multiple lenders at once with no impact on your credit score.
3. Cosigners can be released from responsibility on some private student loans
Many private student loans offer cosigner release after the primary borrower makes a certain number of on-time payments.
This can be a huge benefit for the cosigner who doesn't have to remain legally responsible for repayment for a long time (potentially for decades). It's also a benefit for students who want to take out loans in their own name but who need a cosigner to do so, as it may be easier to find someone willing to share liability for the loan for just a few years.
Parents may prefer to cosign for a loan in their child's name so they only have the loan on their credit history for a limited time, rather than taking out a Parent PLUS Loan in their own names that they're responsible for during the entire duration of repayment. Parents can voluntarily choose to help their child repay the cosigned loan, but it won't affect their own borrowing ability.
To find out if a cosigned student loan is affordable for you, check out Credible's online student loan calculator to compare costs, determine your monthly payment, and make an informed borrowing choice.