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Responsibilities of Cosigning A Loan

May 20, 2019

It’s often thought about pretty commonly that people will attend college. What often isn’t discussed is how people will afford to pay for their college degree. When looking for available financial aid options many look to private student loans to pay for college. Once completing the application don’t be surprised if it is denied because of your financial history or lack thereof. Unless your parents opened up a credit card account for you as an authorized user when you born, you probably won’t have a long enough credit history. Don’t be overly heartbroken, since you aren’t the only one without a long credit history. A way around not having an established credit history is to talk with a parent or guardian about being a cosigner on your student loan. This isn’t an easy process, but it can be worthwhile if both parties understand the responsibilities that are associated with cosigned student loans. Additionally, adding a cosigner to a loan may not be the right answer.

 

Having a cosigner can help qualify you for a student loan because the right cosigner should have an established credit history. As a lending institution, it would be too difficult to lend to a borrower who hasn’t yet shown that they are financially responsible. Adding a cosigner who is financially responsible, for a loan assures the lender that the loan is less of a risk and is more likely to be paid back.

 

If you like sports, think of it like a basketball game. If you’re injured and can no longer play, a substitute or someone on the team plays the game in your place. A cosigner would be your financially responsible substitute in the game of loans. If you are unable to carry the financial burden of a loan at any time and take a knee, a cosigner is expected and legally responsible to repay the debt.  Though the concept of adding a cosigner can seem fairly simple, there is a lot that goes along with it. Here are a few things to understand, before you even consider asking someone to cosign your private student loan.

 

 

Why would you need to add a cosigner to a loan?

 

There are multiple different cases why you may need a cosigner. If you have never owned a credit card, had a loan before or held any type of credit, you may have no established credit history. Even if you have had credit for a short time, there may not be enough history for the private loan company to evaluate. If you have a large loan you’re interested in taking out, it’s highly unusual that the loan will be provided to someone with a year or less of credit history. Based on your credit history a student loan company can see how often a person is paying off debt and what their credit score is. Without a credit history, it can be hard for a student loan company to evaluate if you will be on time for loan payments.  With a cosigner, the student loan company can evaluate the financial history of the cosigner and see that they are a reliable applicant.

 

Another reason that you may need a cosigner is that you have a bad credit score. If your debt-to-income ratio is too high, you have an unsteady income, or you have previous defaults on your credit history, this could be a reason why you’d need to add a cosigner. A cosigner can help qualify you for a private student loan. When having a cosigner, it is the cosigner’s loan and they are fully responsible for that loan too. Though your cosigner is not using the loan, it is equally their responsibility to make sure the loan is paid off. If you choose to ask a family member or friend to be a cosigner, it is important they understand the financial responsibility that they are taking. For example, if you do not pay your loan, your cosigner will have to pay it off. A cosigner will need to have a good credit history and consistently have responsible financial habits. You may be thinking of multiple different people who could be your cosigner. Before diving in, be sure to understand who can cosign your loan.

 

Who can cosign a loan for college?

 

When evaluating the need for a cosigner, you will need to know who is eligible. Undergraduate and graduate private loans lenders have a list of criteria that a cosigner must meet. The criteria for a cosigner will be different based on each lending institutions policy and eligibility requirements. Here’s a breakdown of some of the general eligibility requirements needed.

 

  • A cosigner must be a United States citizen and of legal age.
  • Legal age will vary by state, so it is important to look up the legal age for your state of interest.
  • As for your preference, it needs to be someone you trust. Maybe start by asking a parent or close relative.
  • Needs to have a good credit score, and has to know all the financial responsibilities of a cosigner.
  • The cosigner will be required to have a consistent employer or a steady income. If a family member is not an option, consider a dependable, close friend.
  • Some private loan companies require that the cosigner have the same address as the applicant.

 

Cosigner Responsibilities

 

Make sure your cosigner fully understands what they are committing to and that you both discuss the responsibilities needed from a cosigner. Being a cosigner can be unpredictable. As a borrower, you may not be able to pay off a loan that you have taken on and your cosigner will be accountable for the remainder of the student loan payments. This could affect a cosigner and their future. Go over the cosigner paperwork and discuss all the options you have. You both will have equal responsibility throughout the life of the loan.

 

Cosigner responsibilities include payment on any late or missing payments as per the contract of the private loan. The cosigner’s credit report will show the student loan, therefore, any late payments will affect the cosigner’s credit score. A cosigner, by cosigning, is adding more credit to their credit history. Therefore, if the cosigner needs their own loan, they may find it difficult due to the additional credit added from the private loan.

 

A creditor may have different ways of collecting loan debt, but they can garnish wages depending on the state the loan is originated in. If the loan is not paid, you or the cosigner’s employer may be required to refuse a portion of your paycheck and send it to the creditor. In addition, a private loan may have clauses included in the document. Be aware that a clause may require the loan amount paid in full at the time of a cosigner’s death. Meaning if you ask someone to be a cosigner and they pass away the debt may have to be paid in full at that time. The same can go for the cosigner if the borrower passes away, the full debt balance could be expected at the time of the borrower’s death. Open communication between you and your cosigner is vital. Go over all clauses, liabilities, and possibilities to ensure you are both aware of the circumstances.

 

Factors to consider when selecting a cosigner

 

A cosigner needs to be someone who is completely able to pay off your loan. The private loan company will want to see that the cosigner has a steady income. A steady income means that they have reliable employment or a consistent form of payment. Without a steady income, the loan company will have no evidence that your cosigner has the funds to help pay off the loan.

 

Your cosigner will need to have a decently lengthy credit history. Along with the cosigner’s credit history, the lender will review their credit score. A credit score will illustrate to the loan company that the cosigner has borrowed money previously and was able to pay it back on time. A private loan company is always looking for a trustworthy candidate that will be capable of paying back their debt. While the loan company will decide if you and your cosigner are qualified, it is important that you have a dependable cosigner.

 

Cosigning will be a long term commitment and all clauses must be considered. Good health will be a factor when choosing a cosigner. Good health may seem like an odd qualification to have. If your cosigner dies, your loan could automatically be placed in default regardless of the payments you have made. Due to unfortunate circumstances, this could have a harmful effect on your credit score.

 

Whether it a relative or close friend, you and your cosigner must be on the same page. Once you have a loan you both will share the responsibility of getting it paid off. Talk about financial barriers together. If you are unsure you can pay off the loan, let your cosigner know ahead of time. This could help prevent any devastating effects on your credit scores in the future.

 

Benefits of using a Cosigner

 

While having a cosigner is a serious decision, it does include benefits. One of the biggest advantages to adding a cosigner is that it could help you to have a better interest rate. Adding a cosigner with a good credit history, and income, private loan companies may give you a lower interest rate. How can having a cosigner get you a lower interest rate? Since your cosigner should have an established credit history and income, it means that the loan is less risky for the lending institution. If the loan is more likely to be paid back based on previous borrower history, then the lending institution will provide a more attractive interest rate on the loan. Having a lower interest rate on your loan could mean thousands of dollars saved from debt repayment.

 

Secondly, having a cosigner could assist you with your own credit. Since a cosigner gives you a better chance at receiving the loan, you’re more likely to establish the credit to further build out your credit history. Assuming you’re able to make the monthly payments on your student loan, you will start to build a credit history. If you are paying on time, this will help you to improve credit for future needs and purchases for both you and cosigner. Without a cosigner, you may not be eligible for the loan and would not be able to get a jump start on your credit. Cosigning for a debt is not something that should be taken lightly by anyone. This could be the right answer for you or it could be the wrong answer. It’s important to review all your options as a borrower and discuss the liabilities and responsibilities of cosigning with your cosigner.

 

10 Facts About Student Loans That Can Save You Money

 

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Happy couple admiring their home
2020-10-22
Should I Build Home Equity or Pay Down Student Loans?

Owning a home is a goal for many people. In fact, 40% of young millennials are saving to buy a home. If you already own a home, congratulations on achieving your goal! If you are now faced with a mortgage and student loans, you may wonder which debt you should prioritize. Should you build home equity or pay down your student loans?    Here we will explain what home equity is, how to build it and when it’s better to focus on home equity or paying down student loans.   

What is Home Equity?

When you pay on a mortgage, even if you haven’t yet paid it off completely, you’re building equity in your home. Home equity is the difference between the market value of the house and what you owe. Here’s an example of how to calculate it:  

How to Calculate Home Equity

  You can calculate your home equity by subtracting the balance of your mortgage from the current value of your home. The value of your home is determined by the fair market value of your house or the appraised value. This number is the true value of your asset (your house) since it takes into account the amount you owe on the loan.    Your home equity is calculated in your net worth. You may have heard that home equity can be “tapped into.” This means you can borrow against the equity of your home and use the money in a variety of ways. A home equity loan can cover home renovations or pay off higher-interest debt.    Your home is valued at $375,000 and your mortgage balance is $275,000. You determine the equity by taking the value of $375,000 and subtracting the mortgage balance of $275,000. The equity in your home is $100,000.   

Home Equity and the Housing Market

  Your home’s equity often increases when you make mortgage payments, especially when paying down the principal on your loan. Your home’s equity can also increase when its value rises. Although the value is determined primarily by the housing market, you can raise the value through home improvements.   Just as the value of your home can increase based on the market, however, it can also decrease based on the market. The only sure way to increase your home equity is by paying down your mortgage loan. The more of the loan you pay off, the more your equity increases.  

Building Home Equity vs. Paying Down Student Loans

  If you follow the normal payment schedule, you’ll increase your home equity slowly. If you make extra payments towards your mortgage, you can build equity faster. However, if you also have student loans, should you build home equity or pay down your student loans instead? Let’s take a look at some factors that can help determine the best course of action:   

Interest Rates

If either your mortgage or any student loan has a variable interest rate, you may want to focus on that loan first, because you are at risk that the rate can rise and leave you with a higher payment to make. In addition, if one of your loans has a much higher interest rate than the other, you may choose to focus on it first.  

Security

With student loans, in certain instances, if you are facing financial hardships you can temporarily suspend payments. Mortgages offer less flexibility with payments, therefore missing payments can result in foreclosure and losing your home.  

Loan Balances

If you have student loans with lower balances than your mortgage, you may be able to pay them off more quickly. Then, you can continue to build equity after paying down your student loan debt.   

Tax Implications

You may get a bigger tax break by building equity versus paying off student loans. However, this doesn’t apply to everyone. Interest paid on student loans is deductible, however, there is a cap on how much. As of 2020 the cap is $2,500. Your income must meet the requirements to be able to deduct this amount.    Interest paid on mortgages is also deductible, but only if you itemize your deductions. The mortgage interest deduction can be much higher than $2,500. To learn more about either of these options, consult with your tax advisor.  

Refinancing Your Student Loans With ELFI

If you don’t want to choose between building equity or paying off your student loans, then consider refinancing your student loans with ELFI. Use our student loan refinance calculator* to see how much you may be able to save.   

The Bottom Line 

Each person’s financial goals and situation are unique, so you have to make the best decision for you. Hopefully, however, knowing more about both options and which is better in certain circumstances will help you make an informed decision.  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no­­­ control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.   *Subject to credit approval. Terms and conditions apply.
2020-10-20
Engineering School Student Loan Refinancing

Student loan refinancing is a fantastic option in many high-earning professions, and engineering is no exception. Most engineering students pursue bachelor’s degrees, and the average engineer’s student debt falls roughly in line with the national average of $35,173.    While engineers work hard to earn their degrees, the payoff is oh, so worthwhile. The average entry-level salary for engineers is $57,506, and the average salary across all experience levels is $79,000. This varies by the type of engineering you choose, as well. Big data engineers are among the highest-paid in 2020, with a median salary of $155,000.   Engineering students are often top candidates for student loan refinancing because of their low debt-to-income ratios. Here are a few more things you should consider refinancing your engineering student loans:  

Benefits of Student Loan Refinancing for Engineers

Student loan refinancing is a strategy that can help engineers better manage and pay off debt. When you refinance your engineering student loans, a private lender will “purchase” your debt from your original lenders. You can request rate quotes from several different lenders, then refinance with the one that offers you the most competitive rate. Decreasing your interest rate means you’ll pay less over the life of the loan.   Here are just a few of the benefits of student loan refinancing for engineers:
  • Ability to consolidate student loans into one monthly payment
  • Option to choose between fixed and variable student loan refinancing interest rates 
  • Chance to earn a lower interest rate, potentially lower than federal student loans 
  • Opportunity to change your student loan repayment term
  To see how much you could save by refinancing your engineering student loans with Education Loan Finance, try our Student Loan Refinance Calculator.*  

How to Refinance Engineering Student Loans

Refinancing your student loans is normally a quick and simple process, and you can apply in minutes at home. If you’re curious about the process of refinancing, take a look at our student loan refinancing guide.   Researching lenders has very few downsides. Most lenders prequalify applicants using a soft credit check, which won’t hurt your credit score. Just know that before you can officially refinance your loans, your lender will likely need to do a hard credit check.   Here are the next steps to take if you’re thinking about refinancing your engineering student loans:
  • Figure out which how much or which loans you’d like to refinance. 
  • Make sure you meet student loan refinancing eligibility requirements.
  • Shop around and compare pre-qualified rates from multiple lenders. 
  • Submit an application to refinance your student loans 
  • Finalize the loan application by reviewing the loan terms & signing the documents provided by the lender. 
 

Alternatives to Pay Off Engineering Student Loans

If student loan refinancing doesn’t seem like the right fit, you have plenty of alternatives to explore. From student loan assistance to student loan forgiveness, engineers may qualify for a variety of repayment options.  

Student Loan Forgiveness for Engineers

  Select engineers may qualify for Public Service Loan Forgiveness (PSLF). If you do qualify, you’ll make payments for a specified amount of time, normally 10 years, then the remaining balance will be forgiven. You will, however, still have to pay taxes on the forgiven amount.   Here are a few ways in which engineers may qualify for Public Service Loan Forgiveness:
  • Working in areas of national need could provide up to $10,000 in loan forgiveness over five years of service
  • Working for a non-profit, government agency, or other eligible employers could provide loan forgiveness after 120 payments (10 years)
  • Working as a teacher could provide up to $17,500 in loan forgiveness if working at a low-income school or other eligible agencies
  If you aren’t sure which is right for you, research student loan refinancing vs. PSLF. While both may help decrease your debt, it’s important to know how they compare before taking the next steps.  

Income-Based Repayment Plans

If you don’t qualify for Public Service Loan Forgiveness, you may also choose to pursue an income-based repayment plan. These types of plans set a monthly payment as a percentage of your income. Income-based repayment may be a good fit for entry-level engineers who are still working toward higher salaries.   Here are a few types of income-based repayment plans available to engineers:
  • Pay-as-You-Earn (PAYE): PAYE plans are based on a percentage of your adjusted gross income and family size. They are available to individuals who borrowed after 10/1/2007, or those who received eligible Direct Loan disbursements after 10/1/2011.
  • Revised Pay-As-You-Earn (REPAYE): REPAYE plans are similar to PAYE plans, but do not have date restrictions on the loans. They do take your state of residence into consideration, however.
  • Income-Based Repayment (IBR): IBR plans require you to be experiencing financial hardship. If you qualify, they are based on a percentage of your adjusted gross income and family size.
  • Income-Contingent Repayment (ICR): Many individuals who can’t qualify for PAYE or IBR plans apply for ICR. These start as a percentage of your adjusted gross income, then grow as your income grows.
 

State Student Loan Assistance Programs

Engineers are highly valued in the professional world. Some states and private organizations have created student loan repayment assistance programs for STEM professionals, with the goal of encouraging students to pursue these careers.   If you’re an engineer looking for student loan assistance, here are a few examples of state-driven programs you may be eligible for:
  • Harold Arnold Foundation
  • Wavemaker Fellowship
  • North Dakota DEAL Loans
 

Employer Student Loan Repayment Assistance Programs

Some employers provide student loan repayment assistance as a job benefit, which operates similarly to a 401(k). You designate a certain dollar amount to your student loan payments each month, and your employer matches your contribution up to a cap amount. These types of benefits can help improve employee retention rates while supplying necessary financial aid.  

Refinance Your Engineering Student Loans with ELFI

If you’re ready to refinance your engineering student loans, ELFI can help. By refinancing your engineering student loans with ELFI, you’ll enjoy benefits including:
  • No application fees 
  • No origination fees
  • No penalty for paying loans off early
  • If approved for refinancing, ELFI has a referral bonus program
  Ready to get started? Learn more about student loan refinancing with ELFI and apply today: https://www.elfi.com/student-loan-refinancing/.*  
  Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no­­­ control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.   *Subject to credit approval. Terms and conditions apply.
Current LIBOR Rate
2020-10-19
Current LIBOR Rate Update: October 2020

This blog provides the most current LIBOR rate data as of October 19, 2020, along with a brief overview of the meaning of LIBOR and how it applies to variable-rate student loans. For more information on how LIBOR affects variable rate loans, read our blog, LIBOR: What It Means for Student Loans.

 

What is LIBOR?

The London Interbank Offered Rate (LIBOR) is a money market interest rate that is considered to be the standard in the interbank Eurodollar market. In short, it is the rate at which international banks are willing to offer Eurodollar deposits to one another. Many variable rate loans and lines of credit, such as mortgages, credit cards, and student loans, base their interest rates on the LIBOR rate.

 

How LIBOR Affects Variable Rate Student Loans

If you have variable-rate student loans, changes to the LIBOR impact the interest rate you’ll pay on the loan throughout your repayment. Private student loans, including refinanced student loans, have interest rates that are tied to an index, such as LIBOR. But that’s not the rate you’ll pay. The lender also adds a margin that is based on your credit – the better your credit, the lower the margin. By adding the LIBOR rate to the margin along with any other fees or charges that may be included, you can determine your annual percentage rate (APR), which is the full cost a lender charges you per year for funds expressed as a percentage. Your APR is the actual amount you pay.

 

LIBOR Maturities

There are seven different maturities for LIBOR, including overnight, one week, one month, two months, three months, six months, and twelve months. The most commonly quoted rate is the three-month U.S. dollar rate. Some student loan companies, including ELFI, adjust their interest rates every quarter based on the three-month LIBOR rate.

 

Current 1 Month LIBOR Rate – October 2020

As of October 19, 2020, the 1 month LIBOR rate is 0.15%. If the lender sets their margin at 3%, your new rate would be 3.15% (0.15% + 3.00%=3.15%). 

 

Current 3 Month LIBOR Rate – October 2020

As of October 19, 2020, the 3 month LIBOR rate is 0.24%. If the lender sets their margin at 3%, your new rate would be 3.24% (0.24% + 3.00%=3.24%). 

 

Current 6 Month LIBOR Rate – October 2020

As of October 19, 2020, the 6 month LIBOR rate is 0.25%. If the lender sets their margin at 3%, your new rate would be 3.25% (0.25% + 3.00%=3.25%). 

 

Current 1 Year LIBOR Rate – October 2020

As of October 19, 2020, 2020, the 1 year LIBOR rate is 0.35%. If the lender sets their margin at 3%, your new rate would be 3.35% (0.35% + 3.00%=3.35%). 

 

Understanding LIBOR

If you are planning to refinance your student loans or take out a personal loan or line of credit, understanding how the LIBOR rate works can help you choose between a fixed or variable-rate loan. Keep in mind that ELFI has some of the lowest student loan refinancing rates available, and you can prequalify in minutes without affecting your credit score.* Keep up with the ELFI blog for monthly updates on the current 1 month, 3 month, 6 month, and 1 year LIBOR rate data.

 
 

*Subject to credit approval. Terms and conditions apply.

 

Notice About Third Party Websites: Education Loan Finance by SouthEast Bank is not responsible for and has no control over the subject matter, content, information, or graphics of the websites that have links here. The portal and news features are being provided by an outside source – the bank is not responsible for the content. Please contact us with any concerns or comments.