Take 4 Steps to Earn a Cosigner Release on Private Student Loans
Nothing causes stress like the combination of family and finances.
And private student loans, which often have a parent or grandparent cosigner, can really bring that stressful mixture to a boil.
But while being a parent is a lifelong gig, cosigning on student debt doesn't have to span the life of that loan.
Some private lenders offer a cosigner release, which lets a cosigner cede responsibility for the loan if the student meets certain requirements.
In the private student loan industry, where most loans have a cosigner -- about 90 percent in 2011, according to the most recent information in a report from the Consumer Financial Protection Bureau -- this can be tempting.
Taking on a private student loan carries risks for both the cosigner and the primary borrower.
[Read more about protecting student loan borrowers after an unexpected death.]
After signing along the dotted line, the cosigner adopts the risk of having to repay the student loan should the primary borrower -- the student -- fail to take responsibility for the debt.
Borrowers have their own set of risks as well. The CFPB released a consumer advisory in 2014 on what happens when a cosigner dies or declares bankruptcy. Depending on the terms of the loan, it may trigger auto-default, with the remaining balance due immediately. For students, even those who were paying on time, that can be a devastating financial blow.
To protect themselves, the CFPB recommends that students apply for a cosigner release when they are eligible. And experts suggest looking into a release as good financial housekeeping. Here are the steps to take to earn a cosigner release -- or find a good alternative.
1. Start with a request: Lenders don't typically put the wheels in motion on a cosigner release without a request from the student, says Heather Jarvis, an attorney specializing in student loans. Students will have to take the initiative to get the ball rolling by calling their servicer or researching the process online.
Borrowers can also send a note, such as this form letter from the CFPB, requesting a release or an explanation of why they are not eligible.
While the terms differ between servicers, there are some standard requirements, say experts. The release is for students in repayment who are in good financial standing.
The borrower will typically need to have made a set number of on-time, consecutive payments. The tally can range from 12 to 48 payments, says Jan Miller, president of Miller Student Loan Consulting.
2. Submit the necessary information: The borrower will likely need to submit proof of employment, income information, credit reports and other financial documents. Income-to-debt ratio is important as well. "If you want to refinance or have a cosigner release, you better have enough money to pay off the debt," says Miller.
In some cases, the application and supporting documents may need to be sent as hard copies, say experts. Some lenders may require that the cosigner sign off on the release as well.
[Discover what cosigners can do if the borrower defaults.]
3. Wait for approval: Approval is not a sure thing, and accounts differ on how often applicants are given the green light.
Citizens Bank, which offers loans to graduates and undergraduates, had 42 requests for cosigner releases in 2014. Of those, 70 percent were approved, says Brendan Coughlin, president of auto and education finance. "We don't get a lot of requests," he says.
Miller, the student loan consultant, estimates that less than 10 percent of applications are approved. "It's typical that they're rejected," he says. "The ambiguity of the rules around it is a problem. It gets in the way."
When borrowers are rejected, "most of the time, the student's not established long enough yet," says John Rasmussen, head of education financial services at Wells Fargo. "They're on a good path, but might need some more time and can try later."
Rasmussen says that students can position themselves for approval by making on-time payments and staying mindful of the other debt they take on.
4. Consider refinancing or consolidating: Another way to nix a cosigner, while possibly earning better repayment terms or a lower interest rate, is to refinance or consolidate into a new loan, say experts.
"Refinancing is a more compelling way to manage your student loan debt," says Coughlin.
[Understand the risks and rewards of private student loan refinancing.]
If they can qualify for the new loan independently, students who refinance their private loans into new private loans can release the cosigner in the process.
In the end, making the call between releasing the cosigner or applying for a new loan is up to the individual and his or her financial situation, says Jarvis. "It's pretty person specific," she says.
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