When you refinance your student loans, you typically get a lower interest rate. But it can be difficult to get approved on your own, especially if you have no credit or bad credit. This is where a cosigner can help.
Here’s what you need to know about refinancing student loans with a cosigner.
With Credible, you can compare student loan refinancing rates quickly and easily.
- What’s a cosigner?
- Cosigner vs. co-borrower
- What lenders look for in a cosigner
- How to refinance student loans with a cosigner
- Is refinancing my loans right for me?
- Pros and cons of having a cosigner
- Can I release my cosigner?
- Alternatives to having a cosigner
A cosigner is someone who applies for a loan with the primary borrower, usually a friend or family member. If your cosigner has a strong credit score and solid income, they can help you get approved or land a lower interest rate or better terms.
But being a cosigner carries some risks. If you default on your loan and are unable to make payments, your cosigner will be responsible for repaying the loan.
Even though cosigners and co-borrowers both have a legal responsibility to pay back a loan, they’re not the same. A cosigner helps a primary borrower qualify for a loan and only agrees to repay it if you default.
A co-borrower, on the other hand, is equally responsible for making regular payments with you from the start. While co-borrowers benefit by sharing ownership of the asset that’s tied to the loan (such as a married couple buying a home together), cosigners don’t have any ownership rights.
If you need to qualify for a private student loan, for example, getting a cosigner like your parent may be your only choice, especially if you don’t have the credit to qualify on your own. With student loan refinancing, your cosigner helps you get a better interest rate.
While each lender has its own unique requirements, most look for the following in a cosigner:
- Strong credit profile — Lenders prefer cosigners with a good or excellent credit score, typically between 670 and 850.
- Low debt-to-income ratio — A debt-to-income ratio (your monthly debt payments divided by your gross monthly income) of no more than 36% will make your cosigner stand out.
- Sufficient income — It’s important that cosigners have enough income to repay a loan if the primary borrower fails to do so.
- Steady employment — Lenders like to see cosigners with a solid track record of employment, as it can be a sign of consistent, sufficient income.
- Stable residence — Some lenders view cosigners who have lived in the same place for several years more favorably than frequent movers.
The process to refinance student loans can also vary by lender. Typically, you’ll need to follow these steps:
- Do your research. Lenders vary, so be sure to compare rates, terms, fees and cosigner eligibility so you can make the best decision for your particular situation. Not all student loan lenders allow cosigners.
- Find a cosigner. Not only should a cosigner have good credit and income, but they should be easy to reach in situations where you need to discuss the loan. Think about who you know that would make a good cosigner. Then, ask them if they’re interested, and make sure they’re comfortable with the responsibility — remember, your cosigner must repay your loan if you default. Asking someone to be a cosigner is a big deal, so choose carefully.
- Gather the necessary documents. You’ll need to provide the lender with personal and financial documents for both you and your cosigner. These may include government IDs, W-2 tax forms and pay stubs.
- Fill out the application. Next, apply for the refinance. Make sure all the information you provide for you and your cosigner is complete and accurate, and submit all requested documents.
- Sign the agreement. Upon approval, the lender will send you an agreement. Both you and your cosigner should review it carefully before signing on the dotted line. Make sure you understand your repayment terms and ask the lender if something is unclear.
- Repay your refinanced student loans. Keep in mind that while your cosigner accepts responsibility for your loans, ideally you’ll repay them without their help.
You may want to consider student loan refinancing for a number of reasons, including:
- You can potentially land a better interest rate and terms, which can make it easier for you to pay off student loan debt.
- If your finances have improved because you paid off other debts or got a raise, for example, refinancing may make sense.
- Refinancing might be worth it if you have a student loan with a variable interest rate and you’d like to refinance to a fixed rate so your payments are more predictable.
Refinancing may not be right for you if you have federal student loans. Refinancing federal loans into a private loan will cause you to lose federal benefits and protections, like loan forgiveness and income-driven repayment plans. In that case, you may want to consider consolidating your federal loans with a Direct Consolidation Loan. This won’t lower your interest rate — your new rate will be a weighted average of all your existing loans — but it can help simplify your monthly payments.
If you’ve decided that refinancing with a cosigner is right for you, check out Credible to compare refinancing rates from various lenders in minutes.
Before you refinance your student loans with a cosigner, consider these benefits and drawbacks.
Pros of refinancing with a cosigner
- Higher chance of approval — If you don’t have the best credit, a cosigner can increase your likelihood of getting approved for refinancing.
- Better rates and terms — With a cosigner, you may be able to secure more favorable rates and loan terms than you qualify for on your own.
- Build your credit score — A cosigner on a private student loan may help you build your credit history, as long as you make your student loan payments on time and in full.
Cons of refinancing with a cosigner
- Can damage your cosigner’s credit — If you miss your loan payments, your cosigner’s credit may take a hit.
- May damage your relationship with your cosigner — You might tarnish your relationship with your cosigner if you fail to repay your loan and put the responsibility on them.
- Cosigner release isn’t always available — Since not all lenders offer a cosigner release option, your cosigner may be tied to your loans for the full repayment term, unless you refinance them with another lender on your own.
With cosigner release, you can eventually remove your cosigner from your loan. Whether or not this option is available to you depends on your lender.
While some lenders allow a cosigner release after a certain amount of time, such as 24, 36 or 48 months, others don’t offer it at all. Despite the potential for cosigner release, your cosigner should be willing to be responsible for the loan for its entirety.
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If you can’t find someone open to cosigning or you don’t want to go this route, here are some alternatives to consider:
- Establish or improve your credit history. To increase your chances of approval on your own, build or strengthen your credit. You can open accounts, make payments on time, keep debt to a minimum and limit hard inquiries. You can also request your credit reports from the three main credit bureaus at Annualcreditreport.com and dispute any errors.
- Take out a personal loan. While taking out a personal loan to pay off your student loans may sound like a good idea, it’s not your best option. Some lenders specifically state that their loans can’t be used for education expenses, and personal loans often have high interest rates.
- Look for nontraditional lending options. Ask your friends and family if they’d be willing to loan money to you. This could potentially offer an interest-free solution.