Some loan companies have a clause that allows for cosigner release. This releases the cosigner of any obligations in the event the borrower cannot repay the debt. Parents sometimes need to sign this cosigner release agreement because the student loan debt can prohibit them from getting further credit. Once the student is able to make the payments themselves, this is a good option for debt relief.
Be sure to ask this question before signing if you to be able to release your name as the co-signer. Not all lenders offer this. The ones who do require that you meet the terms of their contract before releasing yourself from cosigner status.
Some of the more common criteria are listed below.
- Borrowers must have made a minimum number of payments (between 12 and 48)
- The original borrower must have income sufficient to pay on their own
- The amount should be auto-debited monthly from the borrower’s account
- The borrower should build up their credit score (around 750).
Keep in mind that these factors will vary depending on the lender’s requirements and the other circumstances surrounding your situation. Everyone’s loan is different. There may be additional requirements required of the cosigner in order to release the cosigner from the financial obligation.
A cosigner is an extra insurance to the lender. As long as they have a cosigner’s name on the loan, they know that they have a way to get their money back even if the principal signer defaults on their loan. In this way, cosigners are like collateral to the lending institution.
It is understandable, however, that a cosigner may want to remove their name from the obligation. If cosigner plans on buying larger items such as a car or new home, it’s possible they may not be able to do so as long as their name is on the student loan contract.
This is because most lenders use the “debt-to-income” ratio to determine who they should loan money to. The debt-to-income ratio is the amount of debt you have compared to your income. If your income is high, it may not affect this as much. However, a high debt amount can affect one’s ability to pay other obligations.
If someone’s name is on a large student loan, chances are they will be denied other loans as long as it is on the contract.
Being upfront with the student loan with a child before they cosign is an integral part of working together to plan to pay back the debt once the payment begins. Parents should make it clear that they expect their child to pay back the loan on their own and therefore, they should prepare to write it into their budget once their grace period ends.
Additionally, do some homework to find out which loans allow cosigner release and plan a time to implement this so that the cosigner will be free from this financial burden as soon as the borrower can pay it back on their own.