Refinancing your student loans with a cosigner can help you lower your monthly payments and reduce the overall cost of your loan. But it’s not always a good idea.
Read on to find out how to refinance student loans with a cosigner, and how to decide if you should.
What is refinancing?
Refinancing is the process of taking out a new loan to pay off your existing loans. The goal is to secure a lower interest rate, more affordable monthly payments, and overall better loan terms. It can also help you to consolidate multiple loans into a single streamlined payment.
If you secure attractive terms and rates, refinancing can decrease your monthly payment and the amount of interest you’ll pay over the loan term. If you’re struggling to make your payments on your student loans, refinancing could be the solution. As you can see below, a student loan refinance could lower your federal student loan’s APR by up to 5%.
But if you haven’t been consistent about making your loan payments, your credit may have suffered. And with a bad credit score, it’s nearly impossible to qualify for competitive rates. Even if your credit is fine, you may have other credit issues, such as a high debt-to-income ratio. How can you refinance your loan in this position?
The answer is simple: find a cosigner.
What is a cosigner on a student loan?
A cosigner is a person who signs for a student loan alongside you. You apply together, both providing your personal and financial details. If approved, you will both be liable and share equal responsibility for the loan.
If at some point you can’t afford your payments, your cosigner will be responsible for them. Further, the loan will impact both of your credit reports, which can be good if all payment obligations are met or vice versa.
Having a cosigner with good credit can increase your chances of securing attractive rates and terms while refinancing. That’s because a reliable cosigner greatly decreases risk for the lender.
How to refinance student loans with a cosigner
1. Find the right cosigner.
A cosigner should have:
- Good credit.
- Stable income.
- Low debt-to-income ratio.
- Stable job and residence history.
Lenders want to ensure that the money they lend will be paid back, so they’re looking for low-risk borrowers. The less risk a borrower presents, the better the rates and terms they (and you) will get.
Look for cosigners with a good credit score (700 or higher), a low debt-to-income ratio (below 36%), steady income and good credit histories. It also helps if the cosigner has lived and worked at the same place for several years.
It can be difficult to discuss things like income and credit with your colleagues. However, if you’re about to enter into a financial arrangement with someone, it’s imperative that you can discuss matters like these. Seek out a creditworthy cosigner who is responsible, reliable, and forthright about their financial circumstances.
And remember, when someone cosigns for you, they’re committing to covering for you if you fail to make a payment. This can strain or break a relationship. Find a cosigner who trusts you, and if you do fall on their help for a month or two, be sure to pay them back.
2. Get quotes from at least three lenders.
Once you have found your cosigner, it’s time to find the right lender. You have many options, so it is in your best interest to prequalify with at least three. In most cases, you can apply online without any impact on your credit score or that of your cosigner. Lenders often use a soft credit pull to view your credit report without processing a hard inquiry.
Find out if you and your cosigner can get approved, and learn the rates and terms for which you qualify. Note that some lenders require you to apply on your own first, and then will inform you if you’ll need a cosigner to qualify.
3. Compare the lenders to find out which offers the best overall value.
After receiving at least three quotes, compare their offers to find the best deal for you. Consider the following:
- Loan terms. Your loan term is the amount of time you have to repay the loan — typically five to 20 years. The longer your loan term, the lower your monthly payments will be, but the more you will pay overall. It’s best to keep your loan term as short as you can comfortably afford. But make sure not to overextend yourself on monthly payments. If you’re too ambitious and set up monthly payments that you can’t afford, your relationship with your cosigner will suffer.
- Annual percentage rate (APR). Your APR is the percentage of the loan amount that you will pay in interest every year. It may be fixed or variable. Fixed rates stay the same throughout the life of the loan, while variable rates fluctuate with the market. The lower the rate the better, as it means you will pay less in interest. But don’t be tempted by a super-low variable rate — it will almost certainly grow throughout the life of the loan, leaving you paying more than you bargained for.
- Fees. Some lenders charge additional fees, such as origination or prepayment fees. Find out what fees you’ll pay to each lender and factor them into the total cost of the loan.
- Loan amount. The amount you can borrow will vary from one lender to the next. Make sure that you can borrow enough to cover the total amount that you want to refinance.
- Customer service. The quality of service is also important, as you may need assistance over the course of your loan term. If a problem comes up, it helps to have a lender that treats its customers fairly and considerately.
- Payment flexibility. Lenders also vary in the payment flexibility they offer. If you are going through financial hardship and can’t pay your loan, deferment or forbearance programs can be a lifesaver. Find out what options each lender offers.
To find your best rate among industry-leading student loan refinancing lenders, you can use SuperMoney’s loan engine. In minutes, you can see what you qualify for and how much your monthly payments will be. Further, you can compare the above factors side-by-side for multiple lenders.
4. Complete the full application and refinance your loan.
Once you find the right lender, you need to complete the full application process. At this point, the lender will process a hard inquiry, which can cause your credit score to drop a few points. But this step also completes the refinancing process, letting you begin reaping the benefits.
Student loan refinance cosigner release
What happens if your credit improves during the loan term and you no longer need your cosigner? You can apply for a cosigner release.
A cosigner release allows for the removal of a cosigner once the borrower can qualify for the loan on their own.
For example, LendKey allows borrowers to apply for a cosigner release once they have made 12 to 36 timely payments. However, they must provide proof of sufficient income in order to qualify.
This can help you gain the agreement of a cosigner, as it puts less responsibility for repayment on their shoulders.
Should you refinance your student loans with a cosigner?
Now that you know how to refinance student loans with a cosigner, the question is, should you? Consider the pros and cons.
Here is a list of the benefits and the drawbacks to consider.
- Lower your monthly payment and overall cost.
- You may be able to release the cosigner down the line.
- Easy online refinancing is available from many lenders.
- Consolidate multiple loans into one.
- Find a lender with better customer service and more flexible payment options.
- The loan has the potential to strain your relationship with the cosigner.
- You lose some financial independence.
- If the loan goes into default, it negatively impacts both you and the cosigner.
- If you refinance federal loans, you may lose some government benefits.
Refinancing your student loans with a cosigner could save you now and in the long run. However, it’s important to fully understand the implications of the decision before moving forward.
If you decide it is the right financial move for you, the first step is to find the right cosigner, and the second is to find the right lender. Once you have both, you can start taking strides toward fully paying off your student loans!
Ready to get started? Find your best rate today.
Jessica Walrack is a personal finance writer at SuperMoney, The Simple Dollar, Interest.com, Commonbond, Bankrate, NextAdvisor, Guardian, Personalloans.org and many others. She specializes in taking personal finance topics like loans, credit cards, and budgeting, and making them accessible and fun.