Note: This post was submitted to Student Caffé by Andrew Pentis. Andrew covers personal finance for Student Loan Hero. His work has appeared in 30+ publications. We would like to thank him for his submission and credit him as the author of this blog post.
When you agreed to cosign a student loan, you weren't just performing a favor. You assumed legal responsibility for repaying the student loan if the borrower fails to keep up with payments. Maybe you understood what you were getting into by cosigning a student loan. Or perhaps you had no idea.
Whatever the case, you might now be wondering how to undo it all. Here are a few reasons why it might be time for you to seek student loan cosigner release, plus how to achieve it.
Three Reasons Why It's Time to Get Student Loan Cosigner Release
Every situation that involves a cosigned student loan is unique and has its own set of challenges. Still, there are common reasons why cosigners seek to be removed from a student loan agreement. Find out if any apply to your own situation.
1. You want to avoid paying the loan yourself.
Whether your borrower is in repayment or still in school, you could be having second thoughts about getting involved. Perhaps your borrower is already coming to you for help making payments. Worse, they might be ignoring their responsibility, which could lead to delinquency or default.
In the case of a student loan, a lender will come to you when it's unable to collect from your borrower. As the cosigner, you could find yourself making 100% of all future payments. And if you're unable to do so, you could suffer serious consequences, including having your wages garnished.
2. You want to protect your relationship with the borrower.
Most often, cosigners are parents helping a child afford a college education. Even if your borrower isn't your son, daughter, or family member, they probably mean a lot to you. Otherwise, you wouldn't have cosigned their debt.
You might be aiming to remove yourself from their student loan to avoid harming that relationship. If they ask you to help make payments but don't pay you back later, you could feel used. Or if they were to default on the loan and leave you responsible for repaying it, you might find it difficult to forgive them.
Worried that you'll become an enabler for your borrower, you could seek cosigner release to give them more financial independence. If they don't have you to rely on, they might be more likely to take more ownership of their repayment.
3. You want to free up your finances.
Your borrower could have asked you to cosign their loan so that they could ride your better credit score to a lower interest rate. Coincidentally, it's your score that could now be taking a hit.
In fact, "amounts owed" make up 30% of your credit score, according to FICO. The more you and your borrower owe, the more your score could decrease, particularly if you fall behind in repayment.
Also, consider that the student loan (or loans) you cosigned shifted your debt-to-income ratio. The ratio is often used by other lenders, such as home mortgage companies, to assess your finances.
If you have other financial goals, such as buying a home or car, your worsening credit and out-of-whack ratio could make borrowing more difficult.
Three Steps You Can Take to Achieve Cosigner Release
Nine out of 10 cosigner release applications for private loans are denied, according to Consumer Financial Protection Bureau data from 2014 –15. Here are three steps you can take to beat the odds.
1. Sync up with your borrower.
Nothing is more important than getting on the same page as your borrower. You'll want to relay your concerns about cosigning their loan, but you'll also want to hear from them. Maybe they have a plan to attack their student loan debt and a role you can play to ensure it succeeds.
If your borrower is still in school, cosigner release won't become an option until well after they graduate. Instead, use this time to help them understand their loans and formulate a repayment plan. You could use a student loan payment calculator, for example, to explain the concept of interest.
If your borrower is out of school, they should already have a plan for repayment. See how you can help, whether it's serving as a mentor during their hunt for a stable income or teaching them how to budget for monthly loan payments.
Your borrower can also work toward improving their credit score. With a better credit score, the borrower can eventually access student loan refinancing options for potentially lower interest rates and release you from your student loan cosigning duties as well.
2. Review your lender's policies.
Once you and your borrower are in sync, you should contact your lender.
As a cosigner, you're allowed full access to the loan account. Use that access to confirm where your borrower stands in their repayment.
You'll also want to ask the lender about the path to cosigner release. Typically, lenders allow the borrower to apply for cosigner release if they've accomplished the following:
- Graduated from college
- Made on-time payments for a set period
- Passed a credit check
- Proven they have the income to handle repayment
There are some lesser-known obstacles to achieving cosigner release, though. For example, if the borrower enters into student loan forbearance, it could reset the number of on-time payments required to qualify for cosigner release. Also, if your cosigner release application is denied, a lender might require that you wait a year before reapplying.
If your lender hasn't been helpful in the past, you and your borrower might rely on the Consumer Financial Protection Bureau's sample letters for requesting cosigner release. Use the template to ensure you ask all the right questions, including about your lender’s criteria for cosigner release.
3. Make a plan for your cosigner release.
Consider the distance between where your borrower stands now and where they need to be to qualify for cosigner release on your behalf. Then make a plan to bridge the gap.
If your borrower is a freshman in college, for example, your plan could take five years to hatch. If they're already in repayment, you're that much closer to being their ex-cosigner.
Take any cosigner release information from your lender and loop your borrower into the process. If you want the borrower to take ownership over repayment, the quickest way might be for you to take ownership of the path to cosigner release.