Nov. 30, 2016

Some lenders, including AGA partner CommonBond, offer cosigner release options.

parent is proud to partner with CommonBond, a tech-enabled student lender, to help you save on your student loans.  This is part of a series of articles by CommonBond to help you tackle your med school debt. Want to see if you can save through refinancing? Apply online at http://studentloans.gastro.org.

Students using private student loans to fund their education, or graduates looking to refinance their student loans, often may not have the credit history and income required to secure their loans on their own because they may not meet the lender’s underwriting criteria.

According to Greg McBride, chief financial analyst at Bankrate.com, income and debt-to-income ratio are extremely important factors that banks use to determine who qualifies for their loans. However, many recent grads applying to refinance their loans may not have credit history and thus don’t qualify. This is also quite common with medical residents with high debt loads and relatively lower incomes. That’s where cosigners come in.  

A cosigner is someone who commits to repaying a loan if, for some reason, the primary borrower is unable to do so. Typically a cosigner is a parent, grandparent or another close family member of the primary borrower. The cosigner is effectively taking on the same debt (and therefore the same obligation) as a borrower. Credit bureaus consider this debt to be part of the cosigner’s credit history, and it’s counted as outstanding debt in factors like debt-to-income ratios, which could affect a cosigner’s ability to qualify for other lending products.

Here’s what borrowers and potential cosigners should keep in mind when considering taking on student loans:

Cosigning a student loan has various advantages including:

  • Increasing the amount the primary borrower can borrow for their education.
  • Helping the borrower establish a credit history if they don’t already have one.
  • Helping the borrower take out a private loan, often with a lower interest rate than a federal loan, thus helping them save money.

Both parties involved need to understand the responsibility of cosigning:

Because a cosigner is just as responsible for the debt as the primary borrower, cosigning is no small commitment, and it requires careful discussion and consideration between the both parties. Here are some steps to ensure that both parties understand the responsibility involved with cosigning.

Parents should understand when to cosign vs. take out a Parent PLUS loan

Because student loan cosigners are often parents of students, parents should also weigh the pros and cons of cosigning a student’s private loan versus taking out a federal Parent PLUS loan to pay for their child’s education. Here are some of the primary differences:

  Parent PLUS Loan Cosigned Private Student Loan
Primary Borrower The partent is the primary borrower. The student is the primary borrower, even if the loan includes a cosigner.
Type of Lender The federal government offers Parent PLUS loans. Some private lenders have also begun offering parent loans. Private financial institutions offer private student loans.
Interest Rates and Fees The fixed interest rate on Parent PLUS loans is 6.31% for the 2016-2017 school year, with loan fees of 4.272% if the loan is disbursed before Oct. 1, 2016. Private student loan interest rates vary according to the borrower’s credit profile. Fees on private student loans also vary lender to lender.
Repayment Period Repayment on Parent PLUS loans begins immediately after the loan is disbursed, but parents have the option to request a deferment while their child is enrolled at least half-time and for an additional six months after this child is out of school. Interest will accrue on the loan during deferment. Some lenders require payment to begin immediately, while others defer payments until the student is out of school.

Cosigner release can be an option at the right time

Cosigners may not need to stay tied to the debt forever. Some lenders, including CommonBond, offer cosigner release options that can free the cosigner from responsibility for the debt after a set period of on-time repayment by the primary borrower. CommonBond’s policy for cosigner release enables a cosigner to be released from obligation on the loan if:

  • The primary borrower makes consecutive, on-time payments for three years.
  • The applicant meets CommonBond’s underwriting criteria on his or her own.

Because cosigner release policies and procedures vary from lender to lender, it is best to contact your lender directly and ask for the necessary information on how to qualify and apply for a cosigner release.
 

Cosigning student loans can be a win-win for everyone involved if it is done with proper diligence, planning and communication. If you are confident in the primary borrower’s ability to repay the loan, cosigning can be a good way to help a student fund his or her education while building a good credit history.