If you took out loans for college, there's a pretty good chance you used a cosigner. Most recent high school graduates don't have the credit or income history to qualify for a loan that size on their own merit. You probably had a family member—perhaps a parent or grandparent—sign along with you to provide assurances to your lender that someone financially responsible would make the payments if you failed to.
A cosigner can provide the same service now as you apply to refinance your student loans. But before you ask someone to sign on that dotted line, make sure you understand the pros and cons of using a cosigner.
Pros of refinancing with a cosigner
1. The ability to refinance
Should I or shouldn't I? The question becomes somewhat moot if the only way you’re able to refinance your student loans is with a cosigner.
If your student loan refinancing application was denied, if you know that you have a poor credit history, or if you are underemployed, using a cosigner will likely be your only option.
A cosigner with a good credit score and a solid income can make up for what lenders see as deficiencies in your own application. Of course, you could wait to refinance until your credit score improves or you find a more suitable job, but you’ll spend that whole time paying higher interest rates on your current loans.
2. A lower interest rate
One of the biggest benefits of using a cosigner is the possibility of getting a lower interest rate. Even if you don't technically need a cosigner to move forward with refinancing, the extra confidence that a cosigner provides a lender could result in a better interest rate for you.
3. The flexibility to release the cosigner
Many loan terms can last for more than 15 years. Connecting your financial future with someone else for that long might give both borrower and cosigner some pause. One way to address any concerns is to make a plan for releasing the cosigner down the road.
Your loan agreement should state when the cosigner can be released—usually after 12-30 months of full, on-time payments. At that point, you can apply to release your cosigner.
You’ll still need to show that you’re a good loan candidate by providing evidence of a good credit score and solid employment before you can release your cosigner, but you won’t have lost out on the savings from refinancing while you were working toward that improvement in your financial situation.
Cons of refinancing with a cosigner
1. The cosigner is liable for your debts
The basic concept of using a cosigner can be difficult for some people to accept. Your cosigner will be completely liable for your debts. If you default, the cosigner is responsible for those payments, and the default will show up on their credit report.
That means asking someone to be your cosigner is not something to be done without careful consideration. They’re taking on real risk. Talking to a potential cosigner about the steps you’re taking to mitigate that risk—things like budgeting and setting up automatic debit of your payments—could go a long way toward making them feel more comfortable.
2. Your financial future is linked to the cosigner
When you use a cosigner to refinance, you’re getting the benefit of their financial fitness. That benefit requires that they're around to bear the burden if you were to default.
No one wants to think about their cosigner dying, but looking into the impacts of this worst-case scenario is a good idea. Some lenders require payment of the loan balance in full upon the death of a cosigner since that person is no longer available to provide financial assurances.
Make sure you read the loan documents carefully to determine what your liability could be if your cosigner dies.
3. Finding a cosigner can be challenging
You probably don’t have a line of people out your front door asking to take on liability for your student loans. Most people’s cosigner options are limited to individuals very close to them, like a parent or spouse.
But not everyone has a family member willing or able to cosign. If concerns about the risks are holding a potential cosigner back, you may be able to combat their fears by detailing the process and letting them know about all the steps you’re taking to make sure you’re able to manage your payments.
Refinancing with a cosigner may not be for everyone, but it’s the key to significant savings for a lot of borrowers. Find out how much you could save by refinancing your student loans.