With the increasing cost of post-secondary education fees, students are resorting to student loans to help fill the gap between what is offered through grants, scholarships, and their available funds and their actual school costs. This article highlights the importance of student loans and how they can be refinanced to remove cosigners. Lets find out the answer to your question can you refinance student loans to remove a Co-Signer?
What is a Student loan?
A student loan is a type of loan aimed at helping students pay for tertiary education and the related fees, including but not limited to tuition, books, and living costs.
In simpler terms, a student loan is money borrowed from a body–the government or a private lender–for the purpose of paying college fees.
Who is a Co-signer?
Simply put, a co-signer is someone who is legally obligated to pay back a loan if the primary borrower is unable to. A co-signer is usually a parent, guardian, or close friend.
If a loan is authorized with a co-signer, then formal protocols will apply. The loaner will provide a loan agreement that contains the terms and conditions of the loan, which must be signed by both the co-signer and the primary borrower in order to receive the loan. There are a few elements that constitute an eligible co-signer:
1. A good credit record.
2. Stable employment.
3. Good health.
4. A good personal friendship with the student borrower.
Merits of having a co-signer on a loan are:
● The loan may be more easily authorized.
● Co-signing can improve the credit score of both parties.
● The student borrower can get a lesser interest rate and a lesser monthly fee on the loan.
Can you refinance student loans to remove a Co-signer?
The simple answer is yes, you can refinance student loans to remove a co-signer.
The ‘Co-signer–borrower’ arrangement can be very risky for the borrower and the co-signer as the borrower might die or file for bankruptcy before the loan is completely paid. Eventually, the co-signer may wish to be removed from the loan agreement through a process known as ‘Student loan refinancing’.
Student loan refinancing means the primary borrower replaces an existing loan with a new student loan that is only in his or her name. The payment from the new loan is then used to recompense the old loan. Student loan refinancing can also be known as ‘Private student loan consolidation’.
Student loan refinancing is only applicable for private student loans. This means that a private lender, such as a credit union or online lenders, pays off the standing private or federal loan. The private lender then grants the student a new loan at a new interest rate and with a new repayment period.
This process can yield several benefits, including removing a co-signer and obtaining better terms and conditions for a student loan.
Student loan refinancing could be a good choice when co-signed loans are owed to loan servicers that do not allow a co-signer release.
A Co-signer release removes a co-signer from the borrower’s private student loan application after the borrower has graduated from college and has met particular financial conditions.
Several changes may occur as a result of Student loan refinancing to remove a co-signer. Some of which are:
1. Change in Interest rate: Interest rates are usually determined based on; the current economic situation, the student’s credit score, and the co-signer’s credit score. The primary borrower will therefore need to have a good credit score, stable employment, and sufficient earnings to cover the monthly payments and interest rates on the new loan on their own.
2. Change in type of interest rate: Student loans usually have varying types of interest rates. While some have fixed interest rates, meaning the interest rate does not change, others have variable interest rates that change depending on a particular base rate.
3. Change in repayment period: Interest rates are not the only aspect to consider in student loan refinancing. Oftentimes, the new loan has a different repayment period from that of the old one. A longer repayment period will typically lead to lesser monthly payments but extra interest will be incurred. Likewise, a shorter repayment period will have a contrary effect.
What are the Student loan refinancing mistakes to avoid?
While there are several benefits of refinancing to the student loan borrower, Unfortunately, many students do not know how to go about it, and a mistake can be incredibly costly.
The following are common mistakes made by the borrower:
1. Refinancing without planning properly: The importance of adequate planning before taking any step towards student loan refinancing cannot be overemphasized. As earlier stated, loan interest rates are usually based on some factors including the current economic situation, the student’s credit score, and the co-signer’s credit score. Doing proper research on the lender’s terms and conditions before refinancing prevents the borrower from wasting time and money.
2. Making a fixed versus Variable Interest rate miscalculation: Oftentimes, the borrower fails to take into consideration the difference in interest rates between the existing and the new loan. A variable interest rate only benefits the borrower when the market is experiencing a decline because their monthly payments will decrease as well.
3. Refinancing a federal loan into a private one: Replacing a federal loan with a private one can be a great decision, but it can also be a bad one. Many borrowers fail to understand that a refinance cannot be undone. This means that, when the borrower refinances a federal loan into a private one, he or she loses access to the benefits particular to only federal loans.
4. Stopping payments on an old loan before fully processing a new one: In many instances, after being authorized for a new loan, student borrowers stop making payments on their old ones thereby reducing their credit scores. This could lead to the lender of the old loan turning it over to collections, without the borrower even knowing about it.
As with any financial action taken, a student needs to understand the pros and cons of refinancing before he or she makes changes to new or existing student loans especially when the removal of a co-signer is involved.
