Should You Refinance Student Loans With a Cosigner?

Paying back college loans is a fact of life for most grads, but that doesn’t mean it’s fun to make loan payments all the time. It can be particularly unpleasant to try to get out of educational debt if you have a lot of different lenders you’re trying to pay back or if you have high-interest private student loan debt. 

Regardless of your loan amount, refinancing is a solution that can help you to make loan repayment easier under certain circumstances. While not the right choice for everyone, refinancing could lower your interest rate and give you just one lender to pay instead of many. But, if you decide to refinance, there are lots of big decisions you’ll need to make.

One of those decisions is whether or not you should refinance your student loans with a cosigner or try to get a loan on your own. This decision can profoundly affect you and whoever cosigns for you, so make certain you understand all the implications of having someone cosign for your loan.

This guide will help you to understand the pros and cons of using a cosigner so you can make the best choice for your situation.

What is Student Loan Refinancing?

Student loan refinancing, also called private student loan consolidation, is a process by which you can change the terms of your existing student loan debt and alter your repayment term.

Typically, you do this by taking out a new loan, either with your current lender or with a different private lender. There is currently no refinancing program through the government, though you can refinance federal student loans with a private lender, as well as private loans.

Your refinanced loan may have a longer or shorter repayment period than your previous loans, a different monthly payment, a different interest rate, and either a variable interest rate or fixed interest rate. Ideally, your new loan will have a lower interest rate so you can save money on your debt. 

Note that refinancing federal loans is a big decision because you lose access to Public Service Loan Forgiveness, income-driven repayment options, and generous forbearance and deferment options in case of financial hardship. 

To determine if you are eligible for refinancing, lenders will do a credit check as part of the loan application process to look at your credit score and repayment history. If you have a poor credit history, a cosigner may help you become eligible or to receive lower rates.

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You earned a degree—now you deserve a better interest rate

• Rates start at 2.57% APR
• Refinance both federal and private student loans
• Skip one monthly payment each year if certain conditions are met
• 12-month forbearance period as well as academic and military deferment

What is a Cosigner?

Refinancing only makes sense if you can qualify for a new loan at better rates than your existing debt for your original education loan. Because many private lenders issue refinance loans, there are no standard eligibility requirements or rates offered. Each lender sets its own policies and own guidelines for repayment plans and requirements. 

All lenders do, however, consider factors such as your credit score, employment history, and income when deciding whether to approve you for a refinance loan program and when determining what interest rate you will receive, similar to applying for a credit card. Unfortunately, if your credit isn’t great, you don’t earn a lot, or you don’t have proof of steady employment, you either won’t qualify for a loan on your own or your rates won’t be very good.

That’s where student loan cosigners come in. A cosigner is a third party who shares responsibility for your loan. A creditworthy cosigner agrees to be held legally responsible for repaying the debt if you don’t pay it back in full. The debt shows up on your cosigner’s credit report, and the creditor can try to collect from the cosigner if doing so becomes necessary because you stop making student loan payments. Any late payments you make also damage the cosigner’s credit.

A cosigner, whether it’s for the original loan or a refinance loan, take on a tremendous amount of responsibility, but they may make it possible for you to qualify for a loan at favorable terms when refinancing student loans might otherwise be impossible for you.

Pros of Using a Cosigner When Refinancing Student Loans

Using a cosigner when you refinance student loans has some big benefits for you as a primary borrower. Benefits include:

• Increase your chances of approval: Applications for a refinance loan are more likely to be approved when you have a qualified cosigner than when you apply on your own—especially if you’re only recently out of college, don’t have good credit, or don’t have a high income.
• May receive better terms: Because a qualified cosigner reduces the risk to lenders, lenders are often more willing to offer loans with favorable terms and low rates when you have a cosigner.
• Cosigners can make it possible to qualify when you don’t meet basic eligibility requirements: If you are not a U.S. citizen or permanent resident, many lenders require you to have financial backing from someone who lives in the U.S. in order to be able to obtain a loan. If you have a cosigner who is a U.S. citizen, it can be helpful. 

To reap these benefits, you’ll need to find someone with good credit and a solid income who is willing to act as a cosigner. It’s common for student loan borrowers to ask a parent, grandparent, or other older relative who is more established financially to take on this responsibility. 

The Cons of Using a Cosigner When Refinancing Student Loans

While there are clear benefits to having a cosigner, there are also some big downsides as well. The biggest cons of using a cosigner include the following:

• It can be hard to find someone: Many people are unwilling to be cosigners because of the impact cosigning could have on their own finances. And even if someone is willing, unless that person has good credit and a good income, they may not be eligible to be a cosigner, or their cosigning may not help you much anyway.
• It can be awkward to ask: Mixing family and money often creates problems. Asking your relatives to serve as cosigners could be a tense conversation, and there may be hard feelings if they say no or if they say yes and then you end up accidentally doing something that damages their credit.
• The cosigner takes on a big responsibility: Since the cosigner is legally responsible for repaying your debt, your financial actions can profoundly affect another person. If you don’t pay, the cosigner’s credit could be ruined, and they could get stuck with the bill. Even if you do pay, having your debt show up on the cosigner’s credit could adversely impact their ability to qualify for a mortgage or other loans because your debt raises their debt-to-income ratio (the amount of debt relative to income).
• You aren’t truly financially independent: As long as you have a cosigner who shares responsibility for your loans, you may not feel like you’re standing on your own two feet—and becoming financially independent is a big goal for many young people.

Some of these downsides can be minimized by looking for a student loan refinance lender who allows for cosigner release after you make a set number of on-time payments. If this is an option, you can be especially careful to make those payments on time so the cosigner will be released from responsibility ASAP.

Cosigners Can Help You Get a Good Refinance Loan, But This Comes at a Cost

While having a cosigner can be a good thing because it maximizes the chances of loan approval and your cosigner can help you to get better loan terms, the cosigner is taking on a lot of legal liability—and that can create problems in your relationship.

Before getting a cosigner, you may want to see if you can qualify for a refinance loan on your own. If you can’t, just make sure that you can repay the debt—and that refinancing is the best course of action—before you move forward.