How, Why and When to Release a Cosigner

While it is uncommon for a federal student loan to require a cosigner, cosigners can be invaluable to individuals who seek out private student loans. Many students have very short credit histories. Some may have a blemish or two. As a result, including a cosigner may offer a better chance to get a better interest rate and qualify for a loan that you might not have on your own. However, you don’t have to have a cosigner forever. If you decide to refinance, you are not required to apply with your previous cosigner, which would effectively release them from your previous loans.

What Is a Cosigner?

A cosigner is someone who essentially agrees to take on the responsibility of your student loans with you. While you and the institution you attended are the ones to receive the funds, the cosigner states that they also agree to the terms of your loan. If you are unable to pay, your cosigner agrees that they will personally take on the responsibility to make the required payments. It goes without saying that this is a huge responsibility.

Are There Reasons to Remove Someone From Your Loan?

In addition to the potential liability, there may be other reasons that you may wish to remove someone from your loan. When someone cosigns a loan for you, the loan doesn’t just appear in your credit report. It will also appear on the credit report of the person who helped you get the loan. In some cases, this is a good thing. A history of regular payments can actually bolster a cosigner’s credit score, with no additional effort from them.

However, having the loan appear on your cosigner’s credit report can also have negative effects on their credit score. One of the things that your credit report includes is the size of your installment loans, as well as how much the balance has changed over time. If your loans are large, or if it is taking some time to pay them back, this can be read as a risk by creditors. As a result, it may be more difficult for your cosigner to get new credit of their own.

How Do You Remove a Cosigner from a Loan?

To remove a cosigner, it may be necessary to refinance your loan if the original loan did not offer a cosigner release option. In the simplest language, refinancing a loan involves applying for a new loan with new terms which is used to pay off the old one. Then, you continue paying off your student loan under the new terms.
This would eliminate your cosigner and end their responsibility for your loan.

What Are the Requirements for Refinancing without a Cosigner?

In order to refinance on your own, you will need to meet certain criteria that you may not have met when you first applied for your student loan. First, you will likely need to have income that is sufficient to make your monthly payments. Your income is demonstrated with documents such as pay stubs, tax returns, and bank balances.

To qualify for the best rates, you will need a positive and established credit history. This can include several types of credit instruments. Your student loan is an installment loan, which is one type of responsible credit use that lenders like to see. You can also build your credit with one or more credit cards. To ensure that your credit card use helps you instead of hurts, endeavor to keep balances low. Creditors generally want to see usage of 30% of your credit limit or less at any given time.

Are There Other Benefits or Drawbacks to Refinancing?

Releasing a cosigner is just one potential benefit of refinancing a loan. In many cases, it is possible to lower your payments on your loan through refinancing. A lower interest rate, for instance, can potentially save you money each month and over the full term of your loan.

In some cases, people may choose to take a longer term for their loan to get a lower monthly payment. While this can put more money in your pocket each month, there is a downside to this strategy. A longer loan term may result in more interest paid over time. This will often result in more money paid over the term of the loan than if you’d paid it off sooner with higher monthly payments.

It is also important to consider what type of loan you are refinancing and how much time is left. If you refinance a federal loan as a private loan, for instance, you may lose options such as income-based repayment. Take this into account if you think you may want to seek that as an option later on.

Summing Up

Student loans make it possible to achieve education goals, but they come with a lot of responsibility as well. When you are considering choices like refinancing your loans, it’s vital that you understand all the benefits and drawbacks of that choice. By thoroughly investigating your options, you can get the most benefit out of your choices for you and for your cosigner. Over time, you can build credit, eliminate debt, and possibly save money on your student loans.