Student loan debt is a major source of college funding for many students. But after graduation, it can be a challenge to manage multiple loans with varying interest rates, whether federal or private. For this reason, numerous private lenders offer student loan refinancing.
By refinancing a student loan, borrowers might be able to choose a better interest rate and repayment plan than they have on their existing federal and private student loans. But they must have strong credit and steady income to be eligible for a refinance loan. When that isn’t the case, they can refinance with a cosigner to help boost their chances of getting approved.
What It Means to Cosign on a Student Loan Refinance
A cosigner is someone added to the loan as a secondary borrower. In what’s probably the No. 1 most important thing to know before you cosign: In most cases, both the student applying for the loan and the cosigner are responsible for repayment for as long as there’s a loan balance to repay.
Cosigners are liable for the debt if the primary borrower fails to make their payments. Typically, the understanding between the primary borrower and the cosigner is that the student will make full payments for the life of the loan; the cosigner is simply used to boost an application’s chance of approval.
What Gets a Cosigner Approved?
Most private lenders offering student loan refinancing have income and credit score requirements for both the primary borrower and the cosigner listed on a loan. These requirements range from lender to lender, but generally speaking, it means having an income of at least $40,000, having a strong credit history, and a credit score in the good to excellent range.
Some student borrowers have a hard time meeting these requirements because they have recently graduated and do not have a high income or good, established credit.
As a cosigner on a refinanced loan, you must meet these lender requirements to help a primary borrower’s application. If you meet these qualifications, you’re likely a good candidate for cosigning a private student loan refinance. However, that doesn’t always mean you should.
Important Considerations to Make Before
Before cosigning on a student loan refinance for a friend, a child, or another family member, consider the following issues carefully.
Can You Afford the Monthly – or Full – Payment?
As a cosigner, you are just as responsible for making payments on the loan as the primary borrower. If they encounter a financial hardship that leaves them unable to cover their payments, the lender will expect you to make the payments.
The same goes if the primary borrower passes away, although some lenders require you to repay the entire loan balance in full if that happens. Be sure to think about your financial situation and ability to cover these payments if something unexpected happens in the future.
Can Your Credit Take the Hit?
Private student loan refinance lenders typically require the primary borrower and you, as a cosigner, to have healthy credit at the time of application. You’re only a good candidate if you have little to no history of missed payments, bankruptcies, or collections accounts.
Also consider what you need as far as access to new credit in the future before signing on the dotted line. Lenders reviewing your credit history for a new loan, credit card, or mortgage will take into account the full monthly payment of the cosigned student loan. This may lower your debt-to-income ratio and ultimately hurt your chances of getting approved for the credit you need when you need it.
Also, it is essential to know that if the primary borrower misses a payment, your credit will take a hit. Think through these scenarios before cosigning.
How Strong is Your Relationship With the Borrower?
Finally, it is arguably most important for you to consider the relationship you have with the primary borrower before cosigning on a student loan refinance. Should a default happen, your relationship may be severely strained, especially if covering the monthly payments puts a financial strain on you or your family.
It is necessary to talk through these possible scenarios before cosigning on a loan, and ensure you and the primary borrower have a strong communication plan for the future. Take the time to come up with a contingency plan for the cosigned loan, and be sure the primary borrower understands the consequences if they do not manage their responsibilities over time.