best way to plan for cosigner release

Finding the Best Lender for a Cosigner Release

Michael Lux Blog, Strategy, Student Loans 0 Comments

Student loan refinance lenders offer a variety of cosigner release programs.  Some advertise that a release is available after just 12 months, while others require up to 4 years worth of payments.  A few lenders even say that a cosigner release is not permitted, or just done on a case by case basis.  What lender has the best cosigner release policy?

Cosigner Release Basics

Before we get into specific strategy, it is first important to understand what it means for a lender to grant a cosigner release.

Having a cosigner means the lender has two individuals legally responsible for paying off the debt.  This means the debt is far more likely to be repaid than if just one person is responsible.  For this reason, lenders don’t like granting a cosigner release.  In fact, a report by the Consumer Financial Protection Bureau showed that getting a cosigner release was something of a rarity.

The fine print on any cosigner release will require the primary borrower to independently pass a creditworthiness evaluation.  Even if they have never missed a payment for years, and have a steady job, they still must pass the credit check.  When lenders perform this credit check they have almost no incentive to grant the release.

For this reason we normally tell cosigners to prepare to be on the loan until it is paid off in full.  It is the most financially responsible way of viewing this issue.

However, there is one route to getting a cosigner release that is better than any companies cosigner release policy…

A New Lender is the Best Lender for a Cosigner Release

Suppose a refinanced student loan has the primary borrower and mom or dad on the loan.  Rather than jumping through the lender imposed hoops to get the cosigner released, try jumping to a new lender.

The primary borrower can apply on their own to a number of lenders.  New lenders won’t care about the fact that the original loans were cosigned, and they will evaluate the application on its own merits.  Best of all, the new lender actually has a motivation to approve the loan… they want the business.

For this reason, refinancing with a new lender is almost certainly the fastest way to get a cosigner released from the loan.  With approximately 20 companies offering student loan refinancing services, there are plenty to choose from.  Best of all, there is no limit on the number of times you can refinance, so as circumstances and cosigner needs change, it is possible to shift loan terms and lenders accordingly.

The Risk in this Approach

There are two basic risks to planning on a cosigner release by going to another lender.

Risk #1 – Borrower Eligibility – For anyone planning on a cosigner release, this is a very real risk.  If the primary borrower doesn’t have a strong enough credit score or debt-to-income ratio, they may not get approved.  However, this risk is the same for a lender approved cosigner release and for a new lender release strategy.

Risk #2 – Rising Interest Rates – The one major downside to jumping from one lender to another is that interest rates may have gone up in the time between refinances.  If rates have jumped considerably, it is one time that it might actually make sense to jump through the lender hoops for a cosigner release.

Bottom Line

Planning on a cosigner release is a dangerous strategy, but if a cosigner release is the goal, the best lender is almost always to choose a new lender and take your business elsewhere.  Unlike standard release programs that can take years, going to a new lender can be done the second a borrower can get approved on their own.

[Further Reading: Student Loan Refinance Companies offering the Best Rates]