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Whether you’ve been turned down for a private student loan or you’re applying for the first time, it’s important to understand how a cosigner can impact your loan application.

Having a cosigner on a student loan is a bit like a letter of recommendation to get into college. A cosigner can reassure the bank or lender that you are capable of repaying the loan. 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.

Read on to learn more about what a cosigner is and when it may make sense to add one to your student loan application. This article will also discuss some of the risks involved with being a cosigner, and some tips on how to ask someone to be a cosigner on a student loan.

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. Adding a cosigner to a student loan application could help the primary borrower secure 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 cosigner’s credit.

How to Decide If You Need a Cosigner on a Private Student Loan

Before deciding whether you need a cosigner on a private student loan, you’ll want to fill out the Free Application for Federal Student Aid (FAFSA®). This will determine how much aid you’ll receive, and help you and your family determine how much of a gap you’ll need to fill with other sources of funding.

Once all other options are exhausted, students could look into private student loans and consider a cosigner. When considering a cosigner, there are several factors to evaluate, including the type of loan you’ll be applying for, your credit history, credit score, income, and any history of missed payments. Continue reading for a more in-depth discussion of these factors.

1. What Type of Student Loans Are Being Considered?

The type of loans you’re applying for may affect your need for a cosigner.

Federal Student Loans

For the most part, federal loans do not require a credit check or a cosigner. The federal loan types that do not require a cosigner include:

•   Direct Subsidized Loans

•   Direct Unsubsidized Loans

•   Direct Consolidation Loans

The exception is a Direct PLUS Loan, which does require a credit check. Borrowers interested in a Direct PLUS Loan 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, you typically have to check more boxes regarding financial history than you would for a federal student loan.

According to a report by MeasureOne, 92% of private undergraduate student loans and nearly 66% of private graduate student loans originated in the 2021-2022 school year had a cosigner. Based on this, it is more likely than not that a student will add a cosigner on their private student loan application.

Both Federal and Private Student Loans

Once a student has a full understanding of the financial aid they qualify for after submitting their FAFSA, they can determine if federal student loans and other federal aid like scholarships and grants 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.

2. Are You 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.

Undergraduate Student

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. Without an established credit history, there is no track record for lenders to evaluate. In addition, undergrads might not have a steady income, which can also affect whether they are approved for a loan without a cosigner.

Graduate Student

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.

3. How Does Your Credit Score Factor into the Decision?

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 more challenging 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 check their score, many websites offer free credit scores or credit score monitoring (just be sure to read terms and conditions carefully).

It’s possible to 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.

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.

4. How Long Is Your Credit History?

A person’s credit history gives lenders a 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.

The real sweet spot for credit history comes at the seven-year mark. From that point, early negative marks on accounts might have faded away. It shows lenders that a borrower can pay loans and maintain accounts over time.

There are a number of factors at play in lending decisions, but a short credit history could mean that adding a cosigner is beneficial.

5. What Is Your Employment Status?

Lenders want to be sure that you can repay your debts, so they’ll generally also evaluate an applicant’s income.

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. Lending requirements vary based on the lender, but having an established income history may help an applicant avoid needing a cosigner.

Employed Part-Time

While part-time employment can still be beneficial for a loan application, it’s possible that a cosigner might help boost the application. The applicant’s debt-to-income ratio will 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 is not employed, lenders may be more inclined to approve a loan if there’s a cosigner who is able to show stable income.

6. Have You Ever Declared Bankruptcy?

Lenders can and do consider all aspects of a person’s financial history before granting a loan, bankruptcy included. 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.

7. Have You Defaulted on a Loan?

The terms of each 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 lend-ability.

8. Have You Ever Missed a Payment?

On-time payments each month can help show lenders that a person is a responsible borrower. Missing payments or consistently making late payments can have a negative impact on a person’s credit score. Payment history accounts for approximately 35% of an individual’s FICO® Score.

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 they don’t have to be. A cosigner ideally has a stable financial history and a relationship to the applicant where they feel comfortable discussing money.

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, and make it clear it would be their responsibility to take on the payments if you default. Discuss how you could repay the cosigner in the event that you 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. It could potentially 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. Private student loans may 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 and not all private loans will offer this option. Read the terms of your loan carefully to understand the requirements for cosigner release.

The Takeaway

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 common and can improve your chance of approval, sometimes even with a lower interest rate than if you applied on your own.

If a student has exhausted all of their federal student loan options, private student loans could be an option worth considering.

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.

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SOSL19030

A Minsky moment is an economic term describing a period of optimism that ends with a market crash. It describes the point at which a market boom marked by speculative trading and increasing debt suddenly gives way to a freefall marked by plunging market sentiment, asset values, and economic activity.

It is named for American economist Hyman Minsky, who studied the characteristics of financial crises, and whose “financial instability hypothesis” offered reasons why financial markets were and would be inherently unstable. Minsky died in 1996, and the phrase “Minsky moment” was coined in 1998, when a portfolio manager used it in reference to the 1997 Asian debt crisis, which was widely blamed on currency speculators.

How Does a Minsky Moment Happen?

A Minsky Moment refers to something sudden, though the economist maintained that it doesn’t arise all at once. He identified three stages by which a market builds up to the convoluted speculation and complete instability that finally undoes even the longest bull markets.

1.    The Hedge Phase: This often comes in the wake of a market collapse. In this phase, both banks and borrowers are cautious. Banks only lend to borrowers with income to cover the principal of the loan and interest payments; and borrowers are wary of taking on more debt than they’re highly confident they can repay entirely.

2.    Speculative Borrowing Phase: As economic conditions improve, debts are repaid and confidence rises. Banks become willing to make loans to borrowers who can afford to pay the interest but not the principal, but the bank and the borrower don’t worry because most of these loans are for assets — stocks, real estate and so on — that are appreciating in value. The banks are also betting that interest rates won’t go up.

3.    The Ponzi Phase: The third and final phase leading up to the Minsky Moment is named for the iconic fraudster Charles Ponzi. Ponzi invented a scheme that offers fake investments, and gathers new investors based on the returns earned by the original investors. It pays the first investors from new investments, and so on, until it collapses.

In Minsky’s theory, the Ponzi phase arrives when confident borrowers and lenders graduate to a new level of risk-taking and speculation: when lenders lend to borrowers without enough cash flow to cover the principal payments or the interest payments. They do so in the expectation that the underlying assets will continue rising, allowing the borrower to sell those assets at prices high enough for them to cover their debt.

The longer the growth swing in the market, the more debt investors take on. While those investments are still rising and generating returns, the borrowers can use that money to pay off the debt and the interest payments. But assets eventually go down in value, in any market, even just for a while.

At this point, the investors are relying on the growth of those assets to repay the loans they’ve taken out to buy them. Any interruption of that growth means they can’t repay the debt they’ve taken on. That’s when the lenders call in the loans. And the borrowers have to sell their assets — at any price — to repay the lenders. When there are thousands of investors doing this at the same time, the values of the underlying assets plummet. This is the Minsky moment.

In addition to plunging prices, a Minsky moment is usually accompanied by a steep drop in market-wide liquidity. That lack of liquidity can stop the daily functioning of the economy, and it’s the part of these crises that causes central banks to intervene as a lender of last resort.

The Minsky Moment and the 2008 Subprime Mortgage Crisis

The 2008 subprime mortgage crisis offered a very clear and relatable example of this kind of escalation, as many people borrowed money to buy homes they couldn’t afford. They did so believing that the property value would go up fast enough that they could flip the house to cover their borrowing costs, while earning a tidy profit.

Minsky theorized that a lengthy economic growth cycle tends to generate an outsized increase in market speculation. But that accelerating speculation is often funded by large amounts of debt on the part of both large and small investors. And that tends to increase market instability and the likelihood of sudden, catastrophic collapse.

Accordingly, the 2008 financial crisis was marked by a sudden drop and downward momentum fueled investors selling assets to cover short-term debts. Some of those included margin calls, which are when an investor is forced to sell securities to cover the collateral needed to borrow money from a brokerage.

How to Predict the Next Minsky Moment

While Hyman Minsky provided a framework of the three escalating phases that lead up to a market collapse, there’s no way to tell how long each phase will last. Using its framework can help investors understand where they are in a broader economic cycle, but people will disagree on how much debt is too much, or the point at which speculation threatens the stability of the markets.

Most recently, market-watchers keep an eye on the high rates of corporate debt in trying to detect a coming Minsky moment. And even the International Monetary Fund has sounded warning bells over high debt levels, alongside slowing growth around the planet.

But other authorities have warned of other Minsky moments over the years that haven’t necessarily happened. It calls to mind the old joke: “The stock market has forecast nine of the last five recessions.”

The Takeaway

A Minsky moment is named after an economist who described the way that markets overheat and collapse. And the concept can help investors understand where they are in a market cycle. It’s a somewhat high-level concept, but it can be useful to know what the term references.

There’s also a framework that may help investors predict, or at least keep an eye out for, the next Minsky moment. That said, nobody knows what the future holds, so that’s important to keep in mind.

Ready to invest in your goals? It’s easy to get started when you open an Active Invest account with SoFi Invest. You can invest in stocks, exchange-traded funds (ETFs), and more. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).

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