Student loans are one of the major debts that an individual takes to receive education and half of their lives are spent clearing these debts. To pay the loan off soon, refinancing your loan is one of the options that you can go for. Refinancing your student loans can help pay off the loan faster or can even help make your payments more manageable. It all depends on the objective of why someone would want to refinance.
Some private lenders offer options for refinancing your federal, private or even a mix of borrower's private and federal loans. But they can’t perform the consolidation activity. It is solely performed by the government and also they consolidate only federal student loans. Refinancing your loan will give a new loan with a different and probably lower rate of interest with liberal repayment options. Thus, it is one of the ways to repay your loan.
It is a crucial decision to take in order to refinance your loan as you will lose the opportunity to take public service forgiveness program, repayment options based on your income, forbearance & deferment options when you are facing difficulty with finances.
To refinance your loan, there are certain requirements that the lender will look into, the most important one is to have a cosigner to it. A cosigner is an individual who will pay your debt if you are not able to do with conditions to it.
Let us know how refinancing of student loans works with a cosigner to it, the process, related benefits and drawbacks, and other things.
Table of Contents
- Lenders requirement for Refinancing with Cosigner
- Pros & Cons of having a Cosigner for Refinancing Loan
- Need of a Cosigner
- Procedure to Refinance Loan with a Cosigner
- Various Risks for Cosigners
- Release of the Cosigner
- The final statement
A cosigner is a third party who is ready to take responsibility to pay your debt off a new loan or a refinanced loan if you are finding it difficult to repay the loan on certain pre-agreed conditions. There are various things that the lender looks at to approve a student loan cosigner like their credit history, credit score, debt to income ratio and other aspects.
If you will not be doing the payments of the loan on time, then it impacts the credit score of the cosigner as well. You need to be very calculative in terms of getting your loan to refinance and with the cosigner’s creditworthiness.
Lender requirement for Refinancing with Cosigner
As you know only private lenders offer the option for refinancing, their terms & conditions differ from each other. Even though they are different in offering specific services- Citizens Bank is known for its refinancing with cosigners program whereas CommonBond offers to refinance with a cosigner if you fail to qualify without it.
There are few things that lenders in common expect from a cosigner in order to approve the student loan refinancing. The following are the basic requirements.
Good credit score- a Credit score is one amongst all the attributes that the lender will definitely look into to qualify your loan for refinancing. Thus a good credit history and proven credit score are necessary for it. It depends on lender to lender which credit score they take as “considerable” for qualifying refinancing.
In all, a credit score of 700 or above is good for almost all the lenders, this credit can help you in getting fair rates for refinancing.
Stable and sufficient income- The lenders look for a strong income base from the side of borrowers so that they can provide an assurance of having continuous payments throughout the term of your loan. If the lender is in doubt with your present or future incomes, then they wish to consider a cosigner in making you qualify for the loan.
Your debt to income ratio will also be checked taking present loans also so that they can analyze you better. Because at the end of the day they want both parties to be in a win-win situation.
Work and house stability- If you are switching your jobs frequently that shows your instability and it will affect your refinancing approval, same way if it is seen that you have a permanent accommodation for 5 or more years it will help the lender assuring your house stability and can approve your loan refinancing easily.
If you are lacking in any of them, then the lender asks for cosigner to be there so that you can be helped in case of financial hardships.
Pros & Cons of having a Cosigner for Refinancing Loan
Having a cosigner by your side is when you are applying for loan refinancing is good for all the three parties- the lender, the borrower & the cosigner themselves. But there are certain drawbacks to having a cosigner as well.
Let’s go through them one by one to know it better-
Chances of approval will increase - if you are a recent graduate then you may lack in having a good credit score or maybe your income is not fixed, then it is difficult to get loan approvals but if you have the support of your cosigner than you will be able to qualify for it with ease as the lender will consider credit score and related things of your cosigner. This will better your chances of getting the loan approved.
Improved terms of refinancing - a cosigner who is qualified can make the lender trust you more and can offer you better terms and lower interest rates for your refinanced loan.
Beneficial in case you have not qualified for the basic requirement - the basic requirement of loan refinancing is that the borrower should be the citizen of the US if you are a non-resident but your cosigner is a permanent citizen of US. This will be a positive sign of your loan approval. The lender can rely on you and approve your refinancing.
Tough to find a cosigner - being someone’s cosigner is a tough task, as you need to be very keen about their finances. If their finances are not stable, some way or the other it is going to impact your finances also. It is always said to choose the borrower wisely by looking into the complete information.
Difficulty to get someone to cosign your loan - a cosigner can be a family member or a friend, it’s kind of awkward to ask them if they can be your support in refinancing your loan. And getting your personal and professional relationships may create a kind of chaos in your lives.
Responsibility on cosigner - your each and every action on repayment of the loan will have a direct impact on the cosigner’s report as well. Your on-time pays to make their credit good and delays will make it low. Even if you are making irregular payments but this will impact the cosigner’s DTI ratio and it can impact them if they want to have any mortgage or other kinds of loan.
The cosigner needs to be very attentive while co-signing anyone’s refinancing options.
Financial independence - until or unless you are solely responsible for your debts and incomes, you do not feel satisfied with sharing your loan with a cosigner can make you feel that you are not independent yet. So, managing your loan on your own is a dream for so many borrowers and their financial independence comes from there.
The need for a Cosigner
You might have asked yourself why the need for a cosigner to refinance your loan. You should be asking few things to yourself before opting for it. These questions might help you whether you need a cosigner or not
Following are some questions, depends on borrowers to borrowers according to their different requirements-
If the cosigner is in relation to you, will you be able to manage if the payments will not happen on time?
Why you need a cosigner, your own credit score and incomes are not robust to take a loan?
What will be the consequences if you or the cosigner passes away before paying off the loan?
Is communication easier between you and your cosigner?
Thus, it is really crucial to know all the aspects and then make a wise decision which will suit you the best.
Procedure to Refinance a Loan with a Cosigner
To apply for refinancing with a cosigner, there is a pre-set process to be followed. This will help you understand the various requirements during the process and you will be ready to apply for it in one go.
Following are the steps to refinance your loan with a cosigner-
(1) Search for a lender who provides refinancing with a cosigner
There are some lenders who provide options for refinancing with cosigner options. You need to look after those lenders and select accordingly which matches all your requirements.
(2) Get a cosigner onboard for refinancing the loan
Make sure that the cosigner is aware of all the terms and conditions before signing the agreement. They should know all the ifs and buts about it so that they will not face any problem on later dates.
(3) Comparison of rates of refinancing
Before applying for refinancing, you will have to fill a pre-application which will do a soft check on your and your co-signer's credit score. This will give you an idea of what probable interest you can get if your loan will be approved. You can make a comparison of all the rates and decide which lender you will be going with.
(4) Apply for student loan refinancing
After the pre-check, now you can fill the final application form for refinancing the loan with all the related documents required. The documents of you and your cosigner together- the income statement, address proofs, government IDs, Social security number and many more.
(5) Sign the agreement
When you will be approved for the loan, the lender will send you a full agreement with all the terms & conditions and the dos’ and don’ts of the same. You and the cosigner need to sign the contract in order to accept the agreement. Before signing the contract both the lender and cosigner can deny accepting the contract.
(6) Start repayments with a cosigner
Your initial payment and the monthly payments will be outlined in the contract separately, after signing the agreement both have to make sure that the payments are happening on time.
The Risk Faced by Cosigners
The cosigner needs to be very specific while going for co-signing refinancing loan as it is going to impact their report as well, maybe good or bad whatsoever is the case.
Apart from this risk, there can be chances that the cosigner needs a loan, then the prevailing loans will appear in the report and this will impact the denial or approval of any new loan.
If in any case, the primary borrower is not making payments on time, then the cosigner will be wholly liable to pay out the borrower’s debts. Thus, take the decision thinking of all the consequences of it.
Release of the Cosigner
There are some lenders like Citizens Bank, Earnest which offers a release of a cosigner but after the fulfillment of certain conditions. Say, these lenders can offer you a release of cosigner if you have made 36 consecutive repayments on your loan. The reason being that they get assured of your financial stability and also they can rely on you.
In general, the lenders prefer the cosigner to stay with the borrower, it gives them more security for the repayments on refinancing. The release of cosigner is expected to be initiated from the side of the borrower, the lenders don’t initiate on their own.
The Final Statement
In order to refinance your loan with a cosigner, you need to see how things are working for you, is your current status require you to have a cosigner. If you think that you can make your own credit score well in some time then you can opt for continuing without a cosigner.
It will help you better in repaying your debts, your interest rates will be lower if the cosigner has strong creditworthiness and you will feel more secure. You should look for all the possible things and decide on which decision you want to go with respect to your student loan refinancing.