Borrowing a student loan with the help of a creditworthy co-signer can boost your chances of approval and help you qualify for better terms, like a lower interest rate. But, importantly, a co-signer is legally obligated to pay off the loan if the borrower fails to pay, and the loan shows up on the co-signer’s credit report.
This is why borrowers and co-signers will sometimes look for a loan that has a co-signer release option, says Elaine Rubin, director of corporate communications for Edvisors, a consumer resource for college financial aid. “A co-signer release means after meeting all the terms and conditions, the co-signer’s responsibility can be removed from that loan,” Rubin says.
For the co-signer release to be approved, however, the borrower must make a specified number of on-time payments, as well as meet all of the lender’s other requirements.
If you want to be removed as a co-signer, make sure you understand the details of the lender’s co-signer release option, if it has one. “There could be some tricky things in there,” says Rubin. Here’s how it generally works, but keep in mind that the process may vary depending on the lender.
- The borrower must graduate. Lenders typically require that the borrower has completed his or her degree or certificate program before the co-signer can be released.
- The borrower must make a set number of consecutive on-time payments. “Generally, this is anywhere from 12 to 48 months,” says Rubin, though the length of the monitoring period depends on the lender. And consecutive means that if the loan goes into forbearance or deferment at any point, it may take longer to qualify for co-signer release.
- The borrower must formally apply for the release. Some lenders may have an application right online, while others might ask to be contacted in writing or by phone. Then the borrower will need to show proof of income, which he or she can do with documents like W-2s, pay stubs and tax returns, to demonstrate there doesn’t need to be a co-signer on the loan.
- The borrower needs to pass a credit check. The lender will also pull the borrower’s credit report to make sure he or she doesn’t have negative items such as delinquencies, defaults or bankruptcy in his or her credit history.
- Get confirmation that the co-signer is released. The borrower and the co-signer should get documentation that the co-signer release is approved and hang onto it. It might also be a good idea for the co-signer to check his or her credit report after a month or two to make sure the loan is no longer showing as an open account.
Keep in mind that it can be challenging to get approved for a co-signer release. For example, Sallie Mae disqualifies applicants who have had any student loans in hardship forbearance or modified repayment programs in the 12 months before they apply. Such meticulous rules could help explain why a 2015 Consumer Financial Protection Bureau Study found that private student lenders rejected 90% of co-signer release applications.
When choosing a student loan, it might be important that there is an out for you after the borrower graduates. But how fast you can be removed from a loan should not be the sole criteria you think about when you and the borrower select a private lender. Here are some important factors to consider:
- Focus first on the loan cost. “When people are picking loans, they should focus much more on interest rates and payment terms,” says Lux. Favorable terms and less interest will make it easier for the borrower to make on-time payments and will cost you less over time.
- Research the lender’s reputation. While there are always going to be some complaints out there, comb through to look for red flags. For example, if people report that it’s hard to contact a specific lender, that might be a company to avoid.
- Look for lender-specific benefits. Some private student lenders offer autopay savings or other discount opportunities, and you might also find lenders with desirable deferment options. You should also verify that the lenders you’re considering have a co-signer release option.
Getting released from a loan should only have a positive impact on the co-signer’s credit. “The loan will remain in the co-signer’s credit history, but when you remove the obligation of that loan debt, it could open up their eligibility for other types of credit now that their debt-to-income ratio has decreased,” says Rubin.
Although the debt-to-income ratio does not have a direct impact on credit score, it is a key factor in your ability to borrow. For example, if you want to qualify for a loan product or get better rates with a home refinance, a lower DTI will put you in a more favorable position, says Rubin.
If you cannot get your co-signer released from the student loan, you may consider student loan consolidation or refinancing. When you refinance the loan in your name alone, your co-signer is freed from obligation, and who knows? You may qualify for a better rate, which might lower your monthly payment and save you money overall.
If you decide to consolidate multiple student loans in your name alone, you combine these into one monthly payment and possibly extend your term and lower your monthly payment, as well. But be sure to compare both options carefully if you decide to go this route. Each has its own benefits and drawbacks and isn’t a decision that should be made in haste.
It may be possible to remove yourself from a co-signed student loan if the lender offers a co-signer release option. Depending on the lender, the student borrower may be required to make a certain number of on-time payments, pass a credit check and formally apply for a release. Additionally, some lenders may require that the borrower graduates in order to remove a co-signer from their student loan.
Since a co-signer is equally responsible for repaying the loan, their credit score will drop if the borrower misses a payment or otherwise fails to repay the loan. With a co-signer release, it removes the possibility of damaging your credit score if the borrower doesn’t make a payment.
Co-signers are responsible for the student loan as long as payments are still due on it and will be legally obligated to repay the loan. But there is such a thing as a co-signer release, which can happen once the primary borrower makes a certain number of on-time payments and meets other credit requirements.
To recap, here are the picks: