Once you’ve been out of college for a few years, you might be ready to assume full responsibility for your student loan and remove your cosigner from your debt. If so, you’ll be happy to hear that many private lenders offer cosigner release after a year or two of on-time payments.
But while cosigner release can get your parents or other benefactor off the hook for your loan, it might also come with some unexpected downsides. Before applying for cosigner release, consider these six pros and cons:
- Pro: You’ll take the burden away from your cosigner
- Con: You’ll be fully responsible for your debt
- Pro: Your cosigner’s debt-to-income ratio could improve
- Con: You might have a tough time qualifying
- Pro: Your relationship with your cosigner could improve
- Con: You might have to spend years building up your credit
When a parent or other adult cosigns your student loans, they become responsible for your debt in the event you don’t repay it. If you miss payments, both of your credit scores will take a hit. And if you can’t afford repayment at all, your cosigner is expected to step in and pick up the slack.
By removing your cosigner from the loan, they will no longer be responsible for the debt in any way. They won’t have to worry about the possibility of a loan servicer demanding payments or a red mark showing up on their credit report.
While releasing your cosigner removes any responsibility from their shoulders, it puts all responsibility firmly on yours. You’ll no longer have the safety net of a cosigner who might save your loan from default if you run low on funds.
Instead, you’ll become the only one liable for the loan. With this in mind, make sure you’re ready to assume full ownership of your student loan before giving up your cosigner.
Not only will your cosigner’s finances be protected if they’re removed from your loan, but their debt-to-income ratio (DTI) could also improve. The DTI is a measure of how much debt a person has compared to how much income they make, and it’s one of the ways lenders assess a potential borrower’s creditworthiness.
Since your cosigner is equally responsible for your debt, your student loan will tend to increase their DTI. If they want to take out a mortgage, personal loan or other type of loan, they might have trouble qualifying if their DTI is too high.
But once that debt is removed, their DTI should go down. As a result, they’ll become a more competitive candidate for a loan, likely allowing them to qualify more easily and snag better interest rates.
Although many lenders advertise cosigner release on their loans, you might find it difficult to qualify. According to the Consumer Financial Protection Bureau, 90% of those who applied for cosigner release had their applications rejected.
That’s because in order to qualify, you need to meet pretty strict requirements for credit and income. Essentially, you need to prove you have the financial chops to borrow a student loan on your own.
Every lender sets its own criteria, but most are looking for steady income and a high credit score. To give you an example, some of Sallie Mae’s requirements for cosigner release include that the borrower must:
- Be up-to-date on all Sallie Mae loans for the past 12 months.
- Demonstrate a satisfactory credit history with no default, delinquencies, bankruptcies or foreclosures in the past 24 months.
- Show the ability to assume full responsibility for the student loan on your own.
- Show that you didn’t put any student loan, private or federal, into a hardship forbearance or modified repayment program for the past 12 months.
Not only does Sallie Mae look for a high degree of creditworthiness, but it won’t approve borrowers who have put any student loans, including federal ones, on a non-standard plan (such as income-based repayment or graduated repayment) in the last year.
So even if you have the credit and income to qualify, there could be other requirements that disqualify you from cosigner release. If you have your heart set on releasing your cosigner, make sure to speak with your servicer about all the prerequisites you’ll need to meet.
Along with protecting your cosigner’s finances, releasing your cosigner could have the added bonus of improving your relationship. Sharing debt can be stressful, and it’s easy to point fingers if someone makes a mistake with repayment.
In particular, conflicts can arise if signer and cosigner don’t take the time to set clear expectations around repayment. By removing your cosigner from your student loans, you can take away this potential point of contention from your relationship.
Although you might have your sights set on cosigner release now, it could take some time before you’re able to qualify. Many lenders offer cosigner release after a year or two of on-time payment, but it might take you much longer to build up your credit and income.
Improving your credit score to the point where you become eligible for cosigner release might take longer than you realize. If you’re planning on such a move, start taking steps today to strengthen your credit.
Weigh the pros and cons of cosigner release
Cosigner release can be a very appealing feature of a private student loan. Removing the burden of student loan debt can be a great way of thanking the cosigner who helped you get that loan in the first place.
But unfortunately, cosigner release is out of reach for some borrowers, so be aware of how stringent the requirements are to qualify and start taking steps to boost your credit score and solidify your income. You can also speak with your lender about exactly what you need to do to increase your chances of approval.
Outside of cosigner release, it’s also worth exploring refinancing your student loan in your own name. Although you’ll still have to meet credit and income requirements, refinancing could remove your cosigner from your loan while also potentially lowering your interest rate. (Though note that refinancing can sometimes have downsides of its own.)
Whatever approach you take, make sure to keep up to date on your student loan payments. By doing this, you’ll protect both your and your cosigner’s finances, while slowly but surely improving your chances of qualifying for a student loan in your own name.