Cosigner Release: What to Consider If Refinancing Student Loans to Remove Cosigners
The majority of student loans are approved with a cosigner, often a parent or grandparent, who agrees to take responsibility for the loan if the student cannot make payments. This arrangement can be risky for the borrower and the cosigner, and there may come a time when the cosigner needs to be removed from the loan application through cosigner release.
For example, the cosigner can become saddled with a large debt if a student defaults on the loan. If a cosigner dies or declares bankruptcy, auto-default could be activated and the balance of the student loan could be due immediately. In these cases, borrowers and cosigners could find a way out through a cosigner release.
What is a cosigner release?
A cosigner release removes the cosigner from the private student loan application once the borrower has graduated from college and meets certain financial requirements. The cosigner’s credit is then no longer impacted by the student loan, which frees the cosigner up to take on other debt.
Ways to release a cosigner from your student loan
There are two primary ways to remove a cosigner from your loan application.
1. Ask for a cosigner release on your current loan
Borrowers will be eligible for a cosigner release after they have made a specified number of consecutive payments, usually between 12 and 48, and the lender determines that borrowers can pay off the rest of the loan on their own.
This process typically must be initiated by the student borrower, who first needs to contact the lender to discuss the cosigner release process. Then, the student should send a letter to the lender formally requesting a release. The Consumer Financial Protection Bureau offers several form letters for this step.
The lender then will ask the borrower for information, including proof of employment, credit reports, and income information to ensure the borrower can pay off the debt.
While many cosigner release requests are approved, some are rejected because the student is not established enough yet to show he or she can repay the loan. In that case, lenders recommend that the borrower continue to make loan payments on time, avoid taking on additional debt, and apply for a release again later.
2. Refinance your student loan
This process can produce several benefits, including releasing a cosigner and securing better terms for student loan debt. Students who can qualify on their own for a new private loan should talk to their lender about the possibility of refinancing or consolidating student loans, or shop around with other lenders.
Considerations if refinancing to remove cosigner
If you decide to go with the latter option, it’s important to be aware of what may change as a result of refinancing to release a cosigner from your student loan.
Your Interest Rate and Type May Change
When refinancing student loans to remove cosigners, the interest rate on your loan may change. Interest rates are usually based on a combination of the current economic situation, your credit score and your cosigners credit score. Since your goal is to remove cosigners when refinancing, your credit score will have a larger impact on your interest rate. If you have been able to establish an excellent credit score, you should be able to get a loan with one of the better interest rates available. However, if your credit score is less than stellar, you may have an interest rate on the higher end of what is available today.
Another important factor to consider is the type of interest rate your refinanced loan will have. Some student loans have a fixed interest rate, meaning the interest rate never changes, while others have a variable rate that changes based on a specified base rate plus a premium. Make sure you compare both the interest rate and interest rate type you’re offered on your new loan with your current loan. Removing a cosigner may not be worth a large increase in your interest rate or a change from a fixed interest rate to a variable interest rate if your cosigner doesn’t mind remaining a cosigner.
Your Repayment Period and Payment Amount May Change
Interest rates aren’t the only thing to consider when refinancing your student loans. Refinancing your student loans will result in a new loan that often will have a different repayment period than your old student loan. The length of your repayment period will directly affect your monthly payment. Depending on the loan you pick, your newly refinanced student loan could be repaid over a longer period or a shorter period than the number of payments remaining on your current loan. A longer repayment period will generally result in lower monthly payments but more interest paid over the life of the loan if all other variables are equal. Similarly, a shorter repayment period will have the opposite effect.
Your Relationship with Your Cosigner Could Improve
Cosigning a loan is a big deal. By cosigning a loan, the cosigner essentially says if you don’t pay the loan back, the cosigner will. Missed payments will affect both your credit and the cosigner’s credit. As you can imagine, being a cosigner can be stressful for the cosigner and add unnecessary stress to your relationship with your cosigner. Refinancing student loans to remove cosigners may be exactly what your relationship with your cosigner needs. Once the weight of being a cosigner is lifted, your relationship with your cosigner could improve. Unfortunately, it may take more work to repair the relationship than simply refinancing your student loans if there were major fights over missed payments or damaged credit was involved.
Shop for the best loan options
Make sure to shop around for the best loan options if you do decide to refinance your student loans to remove a cosigner. Once you take the above into consideration, finding the best possible loan for your situation could save you hundreds or thousands of dollars in interest payments over the life of your loan.