As many student borrowers have likely discovered, the process of refinancing your student loans can sometimes involve bringing on a co-signer.
Why, you might ask, do I need a co-signer to refinance student loans that I already had without one?
That’s a good question–but it also has a good answer.
To put it simply: Student loan debt is some of the most “risky” debt that exists. For one, most student loan borrowers are just out of college, meaning they have very little or even no credit history. This makes it hard for lenders to evaluate creditworthiness of lenders.
Secondly, student loan debt is unsecured, meaning that if borrowers can’t pay, the lender really can’t do anything–there’s nothing to recoup like there is when borrowing for a car or a home.
Having a co-signer means that there’s a bit of extra security attached to your loan. If you’re unable to pay, someone else can step in. Plus, you have their credit history (hopefully a good history) attached to the account.
So, while it may not be ideal to have to get a co-signer for your student loans, there are some pretty good reasons behind it.
And there are also some benefits.
1. Qualify for better lenders
Many lenders will require a co-signer in order for borrowers to be eligible to receive funds–especially those with little or no credit history. But, this isn’t always a bad thing.
Lenders are able to offer better rates, terms, and perks if they assume less risk. This means that if they have more stringent underwriting, borrowers can often expect to get a better deal overall if they’re approved.
(Note: This isn’t true of all lenders. But, as a general rule of thumb, it coincides with the lending market on a large scale.)
2. Lower interest rates
Even if a lender doesn’t require that you have a co-signer to qualify for student loan refinancing, you can almost guarantee that you’ll qualify for a lower interest rate if you have a co-signer with a strong credit history.
Again, this all comes down to the risk associated with your student loans. If there are multiple names on the loan, there is less risk of default, and if the co-signer has a strong credit history, then it indicates a high likelihood that the loan will be repaid in full.
Lower interest rates can equate to thousands of dollars in savings over the life of your loan.
3. Better lending terms
As with the previous point, borrowers with a co-signer almost always qualify for better terms on their loan–lower interest rates and more, longer repayment period options.
This just adds to the flexibility available to student borrowers when they’re refinancing. It’s no fun to be trying to get out of one bad situation only to be stuck with only one (or very few) options for a new lender.
In closing: Getting a co-signer on your loan can be a bit of a pain. And, not every borrower needs one. But, for many young graduates with student loan debt, it can mean money saved, better terms, more flexibility, and other perks.