While in most cases federal student loans do not require a co-signer, many private loans do. This is one of the reasons that private loans are not as desirable a means of funding your education as other forms of financial aid. Asking a parent or other loved one to put their own credit score and history on the line to help you borrow the money you need for school can be awkward.
If you have one or more loans that need to be paid back and your co-signer asks you to remove his or her name from the loan, you may have questions. Why would my co-signer ask to be removed? Does my loan servicer or lender have a process in place for removing co-signers? And what happens if my lender won't remove my co-signer?
Why would my co-signer ask to be removed?
The goal of release is to relieve the co-signer from responsibility for repayment of the debt, says Becky House of the National Foundation for Credit Counseling's member agency American Financial Solutions. This can be helpful to the co-signer, especially if they are considering applying for a mortgage, financing an automobile, or obtaining a personal loan for another purpose. As House puts it, being released from the debt "will reduce the debt-to-income ratio of the co-signer and may have a positive impact on their credit score."
"As the primary borrower you may not want to have the co-signer removed because you are depending on him or her to assist in paying back the debt," says John Ulzheimer, president of consumer education at CreditSesame.com.
However, relationships with close friends or family members can be complicated. They did you a huge favor when they helped you obtain funds for your your education. It may be best for the relationship to return the favor and seek release, if that's what your co-signer wants.
Does my student loan servicer have a process for removing co-signers?
House offers the following advice for getting information about co-signer release.
"A clause for a co-signer release may be included in the original loan paperwork," she says. "Often these releases have certain criteria that must be met in order to remove the co-signer from the loan. These can include completing college, having made a certain number of payments on the loan, and of course, being income qualified to make the loan payments. In addition, most lenders will review the credit report of the person remaining on the loan."
Don't see a co-signer release clause in your loan paperwork? It's still worth contacting the lender and asking if they offer this option, says House.
"Just as most credit card companies do not advertise hardship payment plans, student loan lenders do not advertise co-signer releases," she says.
Some lenders don't offer co-signer release at all. What then?
Why doesn't my lender offer co-signer release? What now?
Ulzheimer explains that co-signers protect lenders from risk, either because the borrower has poor credit or because (as is often the case with students) they do not make enough money to qualify for the loan on their own. For this reason, Ulzheimer says it is not uncommon for lenders to refuse to remove co-signers from active debts. That leaves you with two main options: paying off the debt and refinancing the debt into a new loan.
Obviously paying off the debt is the best option. However, if you had the money lying around to pay your loans off, you probably would have done so already. In that case, refinancing the debt into a new loan is the avenue to explore.
"Changing the ownership of an account is basically the same process as opening a new account," says Maxine Sweet, vice president of public education for Experian. "In fact, closing the old account and transferring the balance to a new, individual account is often the only way to remove one party" from the loan.
There is quite a bit to consider when deciding whether to consolidate your student loans, so do your research. If your co-signed loans are ineligible for federal direct consolidation, then you may have to seek out another lender for your new loan.