More than 90% of private student loans are borrowed with the help of a cosigner, according to the Consumer Financial Protection Bureau (CFPB). But, cosigning a loan can affect the cosigner’s credit, such as limiting the cosigner’s ability to buy a home or refinance a mortgage. As a result, cosigners would like to be released from their obligation to repay the debt. Understanding how cosigner release works can help borrowers qualify for cosigner release.
Why Do Borrowers Need Cosigners?
Most college students have a thin or non-existent credit history. These students need a cosigner to qualify for a private student loan. The private student loan is made based on the strength of the cosigner’s credit, not the student’s.
Even when a student can qualify for a private student loan on their own, applying with a cosigner can yield a lower interest rate.
The cosigner on a private student loan is responsible for repayment of the loan. If the student borrower is late with a payment or misses a payment, the lender will seek repayment from the cosigner.
Being a cosigner can affect the cosigner’s credit, as the loan is listed on the cosigner’s credit history. If the borrower does not make payments on time, it will ding the cosigner’s credit scores. The monthly payments will count against the cosigner’s debt-to-income ratios. This can limit the cosigner’s eligibility for new financing, such as credit cards, auto loans and mortgages.
The cosigner might object that the private student loan isn’t really their loan, but the cosigner is legally obligated to repay the debt.
What Is Cosigner Release?
About three-fifths of private student loan lenders offer a cosigner release option.
The borrower applies for cosigner release after making a number of consecutive, on-time monthly payments and satisfying credit criteria. If approved, the cosigner will be released from their responsibility to repay the private student loan.
After the borrower qualifies for cosigner release, the borrower is solely responsible for repaying the debt. If the borrower is late with a payment, it affects only the borrower’s credit history. The delinquency no longer shows up on the cosigner’s credit report.
How to Qualify for Cosigner Release
In order to qualify for cosigner release, the student borrower must meet certain requirements. Cosigner release depends on the borrower’s credit, not the cosigner’s. This is why the borrower applies for cosigner release, not the cosigner.
The borrower must demonstrate that they are capable of repaying the debt entirely on their own based on their financial history alone. This means that the student borrower must be able to provide proof of:
- A Completed Degree. The student must provide proof of completion of their degree or certification program, such as an official transcript. Students who are still in school will not qualify for cosigner release.
- On-Time Payments for Up to 48 Months. It can take several years to qualify for cosigner release. The borrower (not the cosigner) must make a specified number of consecutive, on-time monthly loan payments and continue making on-time payments until approval. On-time payments are payments made by the due date, not within the grace period for late payments. A single late payment can be disqualifying. Although 24 months of on-time payments is the most common requirement, some lenders require as few as 12 months and some as many as 48 months. For example, Sallie Mae requires only 12 months of on-time payments, while PNC, SunTrust and most of the state loan programs require 48 months of on-time payments.
- No Signs of Financial Difficulty. An automatic disqualification for many lenders includes having any loans that were in forbearance or in a modified payment plan. Serious delinquencies of 90 or more days on any debt can disqualify a borrower from cosigner release, as can previous bankruptcy discharges, foreclosures and repossessions.
- Satisfy Credit Criteria. The borrower must be capable of qualifying for the loan entirely on their own, without the cosigner. This includes requirements concerning employment, income and credit scores. The borrower must have stable employment for at least 2-3 years. The borrower must have income that is sufficient to cover the loan payments. This usually means that the monthly student loan payments must be less than 10% of the borrower’s monthly income. The borrower must have very good or excellent credit scores.
Qualifying for cosigner release can be more difficult than qualifying for the original loan without a cosigner. Very few borrowers are capable of making the requisite number of on-time payments. Even if a borrower makes the required number of on-time payments, satisfying credit criteria can be challenging. Many borrowers do not manage their credit responsibly.
Do Borrowers Actually Qualify for Cosigner Release?
Cosigner release is a promise that rarely delivers.
According to the CFPB’s 2015 report, 90% of individuals who applied for cosigner release were denied. With less than 10% of borrowers applying for cosigner release, this means that less than 1% of borrowers succeed in obtaining cosigner release.
In theCFPB’s 2017 report, being denied for cosigner release was a major complaint. Despite following all of the required steps, applicants for cosigner release are still denied and are not given a specific list of actions to take or reasons for their denial.
How to Increase the Odds of Qualifying for Cosigner Release
Borrowers who repay their student loans with auto-debit are more likely to qualify for cosigner release. Auto-debit automatically transfers the monthly loan payments from the borrower’s bank account to the lender. This reduces the likelihood of the borrower being late with a payment.
Before applying for cosigner release, the borrower should obtain a free copy of their credit report at annualcreditreport.com. Review the report and correct any errors.
Sending a letter in addition to the application may help. The CFPB provides a template letterthat is easy to use and email to the lender. This ensures that the borrower is asking poignant questions.
An Alternative to Cosigner Release
An alternative to cosigner release is to refinance the private student loans into another loan without a cosigner.
After graduation, borrowers who manage their credit responsibly and who have a good job that pays well have shifted from an unproven asset to a proven asset. They may qualify to refinance their loans with another lender without needing a cosigner.
When a borrower qualifies for a private consolidation loan, the new loan pays off the old loans, effectively releasing the cosigner from their obligation to repay the debt.
Keep in mind refinancing federal student loans means a loss in many benefits – income-driven repayment plans, any federal forgiveness programs, generous deferment options, and more.
A Final Tip
If the application for cosigner release is denied, file a complaint with CFPB. It can be frustrating, especially as the cosigner, to still have responsibility for the loan.
Continue making on-time payments and apply for cosigner release again. Some lenders will let borrowers re-submit the application for cosigner release. After complaining, the lender may give the borrower more guidelines as to why the cosigner release application was denied. The lender may even allow the borrower to cure the problems with their cosigner release application.