(TNS)–Parents who co-sign for a child’s private student loan can sometimes be released of their legal responsibility for the debt years later. But it’s not always easy to do, according to a new report.
In fact, 90 percent of consumers who apply for a co-signer release are rejected, says the Consumer Financial Protection Bureau, which looked at more than 3,100 private student loan complaints from October to March, among other things.
The reasons for rejection vary. In some cases, borrowers are disqualified if their repayment term has been extended or if payments are postponed temporarily through forbearance.
“Lenders tend to be really, really strict with co-signer release,” says Mark Kantrowitz, a student loan expert and publisher of Edvisors.com, an online resource about financial aid.
If you took out private student loans with a parent and that parent now wants to cut ties with the debt, consider these suggestions:
Know the terms. Study up on the rules. Often, lenders require that a borrower make on-time payments for 12 consecutive months or longer in order to be granted a release.
“And that means making the payment on or before the due date,” Kantrowitz says. “Not around the due date.” To reduce the chance of slipping up, Kantrowitz suggests enrolling in a lender’s automatic payment program.
Just make sure the auto debit comes from your bank account, not Mom and Dad’s.
“Lenders want to see that the borrower will be capable of making payments on his own,” he says.
And not all lenders allow co-signer release. Discover Financial Services, for example, the credit card issuer and a student loan provider, does not offer release on loans that it originates. (Release, however, is available for Citibank borrowers whose loans were acquired by Discover in 2010 and 2011.)
Have a solid credit history. Most students need a co-signer because they have little or no credit history when they first apply for a private student loan. So to qualify for a co-signer release, you must show that your credit profile has improved.
A strong credit score is essential. As of the end of March, the average FICO credit rating for new loans issued by major lender Sallie Mae was 746 (out of a possible 850), according to a company report. Only 21 percent of loans had a score below 700.
You will also need to have a reasonable debt-to-income ratio, which tells the lender you can comfortably afford your monthly payment on your own.
“I’ve seen one example where a borrower was making on-time payments, but he had just switched jobs when he applied for a release and was denied,” Kantrowitz says. “The lender wants to see stability.”
Contact the lender. Don’t wait for the lender to offer you a co-signer release. To get one, you generally have to know when you qualify and actively apply for one.
Some exceptions exist. Discover says it is in the process of notifying customers who are potentially eligible for a release via email. Check your inbox.
Consider alternatives. If you can’t get a co-signer release, you may be able to free your co-signer by refinancing the loan instead. Again, lenders will be looking to see that you have a strong credit score and adequate income.
But if you’ve done a bang-up job of paying your bills on time, lowering your debt and raising your income, doing a refinance could pay off. Citizens Bank began offering refinancing for private and federal student loans last year.
On average, the bank says borrowers have been able to lower their monthly payment by $145. Nearly a quarter of borrowers had a co-signer before refinancing.
Carolyn Bigda writes Getting Started for the Chicago Tribune.
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