Having a cosigner is a big deal to student loan lenders. Instead of having one person legally required to pay back the debt, cosigned loans have two.
The problem faced by many cosigners isn’t just the responsibly to pay back the debt… it is the credit issues that cosigning a loan causes. Cosigned loans appear on credit reports. Cosigned loans hurt an individual’s debt-to-income ratio. A cosigner could be denied on a mortgage application due to cosigned student loans.
Given these factors, it should come as no surprise that many cosigners would like removed from the loan. It also shouldn’t be a surprise that lenders want to keep cosigners attached to the loan as long as possible.
The good news for some student loan borrowers is that removing a cosigner from a student loan can be an easy process in the right circumstances. The lenders call the removal process a cosigner release.
When it comes to securing a cosigner release there are two basic methods used by most borrowers. We will call it the hard way and the easy way. Should the traditional methods of cosigner removal fail, there are also a couple creative options that borrowers might explore.
The Hard Way: Getting Lender Approval for a Cosigner Release
Many lenders advertise that cosigners can be released from loans in as little as one year after the borrower begins repayment. The lender ads typically highlight the fact that the borrower needs to make 12 or 24 consecutive on-time payments on the loan.
In the fine print, almost all lenders also require that the borrower be able to pass a new credit check before the cosigner can be removed. The lenders require this step because they want to make sure that the borrower is “creditworthy” on their own. A history of timely payments on its own is not enough to be released.
The problem with this process is that approvals are hard to get. The company making the creditworthiness decision has every incentive to deny the application. They will always prefer to have two people legally responsible for the debt. Lenders gain almost nothing of value by removing a cosigner. A recent report from the Consumer Financial Protection Bureau shed some light on this issue: the chances of approval are slim.
Given the difficulty associated with securing a cosigner release by going through the existing lender, this approach should only be used by borrowers with excellent credit who want their student loan to stay the same. If the existing loan has an amazing interest rate that can’t be beat, it may make sense to try to get the cosigner release in this method.
In most other cases, the easy way is the best way…
The Easy Way: Find a New Lender
If the existing lender has no incentive to remove a cosigner, a new lender has a huge incentive.
At present there are at least 20 different national lenders offering student loan refinancing services. Due to the intense competition, rates can be as low as 2.5% and lenders are more likely to approve applications without a cosigner.
Refinance applications are typically easier than in-school student loan applications. Most college students have no job, no degree and a limited credit history. As graduates, many are employed with a decent credit history. (Those without jobs or a solid credit score will have a hard time going with this strategy.)
Typically refinancing is done to secure a lower interest rate on the loan. However, the process is an excellent way to remove a cosigner. If the applicant gets approved on their own, the old loan is paid off in full and a new loan is created. From the former cosigner’s perspective, the debt they were legally responsible for shows up as paid in full on their credit report.
Things can get a little hairy if the best available refinance rate is the same or slightly worse than the existing loan. The cosigner may be willing to chip in to cover the extra interest in order to be removed from the loan. The primary borrower may opt to just accept a slightly worse rate in order to help the cosigner out.
The key to this process is understanding that the old loan and old loan terms are eliminated and replaced with a new loan. The advantage is that it can free a cosigner, but if the interest rates are terrible or there are other issues with the loan terms, it can be a mistake.
Some lenders to consider:
|Pros:||SoFi is the only lender who will help a borrower find a job, and they routinely have the lowest rates offered.||LendKey works with a large network of smaller credit unions and banks. As a result, many applicants get the best offer from LendKey.||Splash has the best new customer bonus right now, and they have unique 8 and 12 year repayment terms.||Because ELFI is backed by a bank rather than investors, ELFI rates tend to stay low and fluctuate less than others.|
|Cons:||SoFi has grown into a large company offering mortgages, personal loans, and investment services. They no longer focus entirely on student loan refinancing.||Going the LendKey route does require working with a local bank or credit union. For many, this is a plus, but it is an extra step.||Splash is a newer lender and the longest length loan is 15 years instead of the industry standard 20.||ELFI is one of the newest lenders in the marketplace. As a result we have limited head to head information.|
The primary borrowers who struggle to find a refinance opportunity may have to consider one other option…
Switching Cosigners on a Student Loan
Sometimes swapping out one cosigner for another may be desirable… especially for borrowers who cannot get the cosigner removed on their own. If Grandma needs the loan removed from her credit report but Mom is in a position to have the debt in her name, a swap may be the right move.
Lender policy may vary on cosigner substitution. In most cases lenders will likely frown upon changing cosigners.
Here again, the refinance route may be the path of least resistance. The refinance companies may require a cosigner, but they don’t care if the cosigner is the same as the one on the original loan. They only care that the cosigner has a good credit score an income.
The Hardest Way: Pay the Loan off in Full
Paying off a loan in full is a challenge for any borrower.
Typically, the suggested route to repayment is to pay off the loan with the highest interest rate first. Once this loan is paid in full, the borrower can move on to the next loan until all loans are paid off. Paying off the highest interest rate loans first is preferred because it reduces lifetime spending on interest and gets the debt paid off as fast as possible.
Having a cosigner with a need to be removed from the loan may shift this order of priority. From the borrower perspective, it will cost slightly more to pay off the lower interest rate loan first. However, such a sacrifice may be an excellent way to thank a cosigner for helping make college a possibility.
The Key to Cosigner Release
The standard path for a cosigner release is very difficult for most borrowers.
Instead of looking at cosigner removal as an independent process, borrowers should focus on cosigner loan elimination. This workaround most commonly will most likely take the form of a student loan refinance. The cosigned loan is eliminated and a new loan is created without getting the cosigner involved.
Ideally the original borrower can lower interest rates or monthly payments in the process.