Cosigners Are Helping Borrowers Get Better Rates on Student Loans

For students taking out private loans to cover college funding gaps, having a cosigner not only improves the odds of being approved for a loan, but can help borrowers obtain a better interest rate, an analysis of Credible user data shows. The analysis of rate requests submitted to the Credible student loan marketplace revealedï ¿ ½that private lenders offer rates that can be competitive with costly federal PLUS loans ï ¿ ½ particularly when borrowers apply with a cosigner. Key takeaways: Fifty-one percent of undergraduates shopping for loans with a cosigner on the Credible platform received personalized rate quotes, compared to 20 percent of undergrads who did not have a cosigner. Fifty-six percent of grad students loan shopping with a cosigner received rate quotes, compared to 45 percent who requested quotes without a cosigner. Undergraduates shopping with cosigners qualified for loans with interest rates averaging 5.37 percent. Without a cosigner, rates averaged 7.46 percent. Graduate students shopping with a cosigner got quotes for loans with interest rates averaging 4.59 percent, compared to an average of 6.21 percent without a cosigner. A recent report by MeasureOne shows thatï ¿ ½nearlyï ¿ ½94 percent of private undergraduate student loans are made with cosigners, up from about 75 percent in 2008-2009. But cosigning a loan is a serious commitment. If a borrower can't make their monthly payments, cosigners are not only on the hook for the money that's owed, but late payments could damage their credit history. Yet more college students and parents are turning to private student loans. According to MeasureOne, during the 2014-2015 academic year, the six biggest private lenders made $7.12 billion in student loans, an 8 percent increase from the year before and a 36ï ¿ ½percent increase from 2010-11. RELATED: Best student loan options for parents What's driving the growth in private student lending, despite the fact that these loans typically require a cosigner? The simple answer is that there are annual and lifetime borrowing limits on the most affordable federal student loans. Once they've hit those borrowing limits, students must often turn either to more expensive federal PLUS loans, or private lenders, to bridge any funding gaps. In this Credible Insights report, theï ¿ ½latest in a series, we'll take a closer look at who is willing to take the leap and cosign a private student loan, and why. We'll also talk about the obligations that cosigners take on, and how they can be released from them before a loan is paid off. Who can be a cosigner? While a cosigner is often someone who has close ties to the borrower, such as a parent or spouse, lenders don't spell out what kind of relationships are permissible. Other relatives ï ¿ ½ including grandparents, siblings, aunts and uncle ï ¿ ½ can come to the aid of student loan borrowers. So can friends and employers. In fact, pretty much anybody who cares enough about the borrower's future to help them out can be a cosigner, as long as they are at least 18 years old, a U.S. citizen or permanent resident, and meet the lender's credit and income requirements. An analysis of nearly 8,000 borrowers who requested quotes for private student loans through Credible's multi-lender marketplace shows that parents are, in fact, most often the ones who end up taking on the duty of cosigner. But while parents signed three out four cosigned private student loans facilitated by Credible, other relatives, siblings and friends accounted for a significant percentage of cosigners. RELATED: Everything you need to know about Parent PLUS Loans Cosigner relationship to borrower Benefits of adding a cosigner Although some graduate students may have the credit and income history needed to qualify for a private student loan without a cosigner, most undergraduates will not. The presence of a cosigner with a strong credit and income history is a safety net for the lender ï ¿ ½ with a cosigner, lenders have an extra layer of protection against borrower default. Better chance of qualifying Credible'sï ¿ ½relationships with lenders and credit bureausï ¿ ½allows students or their cosigners to submit one form and compare personalized rate quotes from multiple lenders. As the chart below illustrates, 80 percent of undergraduates who requested rate quotes for private student loans through the Credible platform without a cosigner did not qualify. But a little more than half of those submitting requests with a cosigner (51 percent) got offers from lenders. Many undergraduates who did not qualify with a cosigner could have received rate quotes if they applied with a cosigner with a stronger income and credit history. Exceptions would include students who have previously defaulted on a student loan, or students seeking loans to attend schools not on any lender's list of eligible schools. Impact of cosigner on qualifying for a loan Graduate students were more likely than undergraduates to qualify for a loan without a cosigner ï ¿ ½ 45 percent of those making requests got a personalized rate quote from a Credible partner lender. But more than than half (56 percent) of graduate students who requested rate quotes with a cosigner prequalified to apply for a loan. RELATED: 8 tips on how to make student loans work for you Lower interest rate A cosigner's credit worthiness can not only determine whether a student can get a private student loan, but, in many cases, can also help the borrower obtain a better rate. Lenders on the Credible platform are currently offering fixed-rate private student loans at rates as low as 4 percent, and variable-rate loans starting at 2.20 percent. Those rates are for borrowers or cosigners with excellent credit. The annual percentage rate on fixed-rate private student loans can exceed 10 percent. Undergraduate students using the Credible platform to request quotes for private loans with a cosigner qualified for loans with interest rates averaging 5.37 percent. Without a cosigner, undergraduates qualified for loans with interest rates averaging 7.46 percent (those averages include quotes for both variable-rate and fixed-rate loans). Graduate students saw similar benefits when bringing a cosigner into the process. With a cosigner, grad students qualified for loans with interest rates averaging 4.59 percent, compared to an average of 6.21 percent without a cosigner. Interest rates: private vs federal loans