Wednesday, October 31, 2012

Cosigner release on private student loan applications

AppId is over the quota
AppId is over the quota
July 16th, 2012 by Ken

Given that this time of year is college bill pay season, there are many families searching for a funding solution. But between the heat, busy jobs, vacations and other summer distractions, it’s easy to overlook very critical information about a private student loan application.

Today's Class Topic: Cosigner release

A feature that needs to be considered whenever applying for a private student loan is cosigner release. This has been a big topic for many families given the increasingly large amount of debt that students may require to complete school. Finding better ways to manage debt has become a priority not just for students, but also for those that cosign. Let’s take a look at some important points.

1. What is cosigner release? Cosigner release is the ability to remove the cosigner from a loan agreement at a future date. For many borrowers of private loans, a cosigner is necessary because the primary borrower is a student with limited credit history. Since the borrower cannot be approved by themselves, a cosigner is added to the application to help approve the loan, but they become responsible for repayment of the loan if the primary borrower is unable to repay the loan. Many cosigners would like to know they have an exit plan available.

2. Why is it important for private student loans? When a cosigner is added to a private student loan application, the obligation is recorded on their credit report. This may affect the cosigner’s ability to extend credit to other areas like car loans and home loans until this obligation is settled either by loan repayment or a cosigner release. A student loan can take 10 years or more to repay, but the cosigner may not want to wait that long until they can be removed from the debt. Consider a family with multiple children attending or about to attend college. A parent could become overextended as a cosigner for one child and be unable to cosign for the next child because they have too many pre-existing credit obligations. Cosigner release can help free up credit so that a parent can complete other necessary loans in the future while preventing a family war from erupting.

3. How does it work? A cosigner release from a loan application generally requires three major requirements to be fulfilled.

Minimum number of on time principal and interest payments: The borrower must demonstrate solid repayment habits by making a specified number of full loan payments once they enter normal repayment mode after graduation.Primary borrower has strong enough credit: Before a cosigner will be released from a loan application, generally the primary borrower must have strong enough credit to be “approved” first. This means the primary borrower would need to meet credit requirements to be approved for this loan without a cosigner. Primary borrower credit must be in good shape, and they must be earning a minimum income requirement.Submit a written request for release: Once the borrower meets the minimum requirements, they need to submit the request to the loan provider before the review is initiated. Lenders do not remove cosigners until the request is submitted and all credit and repayment requirements are met, so make sure to follow up with this last requirement.


4. Some features to look out for:
Before committing as a cosigner, scrutinize the minimum requirements for the cosigner release. Find out how many months of on time principal and interest payments are required before release is granted. Consider the timing involved with multiple children in college at the same time. Mom or Dad may need to stagger their ability to individually cosign different applications depending on how many children there are, and the gap between each one entering school, if any. Then consider when the future clearance for debt obligations is optimal. Will it be for a 1st mortgage, 2nd mortgage or HELOC? How about a car loan? The point is that a cosigner should plan out the use of their credit in the future to prevent being over-leveraged when credit is most necessary, as to ensure future loan approvals with the lowest rate available.

Additionally, look for similar features in private student loan consolidation. It may be that the primary borrower needed a cosigner to get approved for a private loan to pay tuition, but after graduation, the borrower may be able to get approved for a private loan consolidation that would no longer require a cosigner. The old student loan applications are fully paid by the consolidation, removing the cosigners obligation and shifting the debt solely to the primary borrower on a stand alone basis.

Finally, if getting a cosigner release as quickly as possible is a priority, make sure the primary borrower begins repayment of loans while in school to begin building a positive credit history as soon as possible. This can help them to transitions to being credit approved for loans in the future on a stand alone basis, as long as income is available.

Tags: 10 years, bill pay, borrowers, car loans, cosigners, credit history, credit report, distractions, exit plan, home loans, jobs, loan agreement, loan repayment, obligation, priority, private loans, private student loans, student loan application, time of year, vacations


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