Will Adding a Cosigner Save You Money When Refinancing Student Loans?June 4, 2020
Student loan refinancing is the process of consolidating student loans into a new loan taken out with a private lender, often with a lower interest rate and new loan terms. If you’re planning to refinance your student loans, you are likely looking to qualify for the lowest interest rate possible, save money over the life of your loan, make repayment more manageable, or pay off your loans faster. As you perform your research about which lender to apply with, calculate how much you could save, and the requirements to qualify, you also may have come across information about the pros and cons of adding a cosigner to your loan and wonder whether adding a cosigner could help save you money. Here are some situations where adding a cosigner can help you, whether it’s to simply qualify to refinance or to save you money.
Adding a Cosigner to Qualify for Refinancing
Student loan refinancing lenders typically have similar requirements to qualify to refinance student loans, but the specifics can vary by lender. These requirements can include things such as:
- Minimum credit score
- Minimum debt-to-income ratio
- Employment history
- Minimum loan amount
- Minimum credit history
- Degree requirements
- Required documents, such as W-2s and pay stubs
Check out ELFI’s full eligibility requirements here.*
If you are in strong standing in all of these categories, you can likely qualify with any student loan refinance lender that you choose. However, if you don’t meet the minimum requirements to refinance, adding a cosigner who has a stronger credit score or credit history may be the solution to helping you qualify. Before adding a cosigner, make sure that they are aware of the responsibilities of cosigning a loan.
Adding a Cosigner to Qualify with the Right Lender
For many individuals who are looking to refinance student loan debt, they face the issue of meeting the requirements of certain lenders but not others. For example, some lenders require a minimum credit score above 650, and some require a credit score of 680. If you don’t meet the requirements of certain lenders, you may feel obligated to choose a lender that has less strict requirements (keep in mind that this typically comes along with a higher interest rate).
By adding a cosigner who meets the requirements of any lender, you’ll be able to choose the lender that offers a lower interest rate, thus saving you money over the life of your loan.
Adding a Cosigner to Save Money When Refinancing
Now that we’ve covered two common situations in which adding a cosigner may help you, whether it’s to simply qualify for refinancing or qualify with the right lender, let’s discuss a third scenario in which you already qualify for refinancing with the lender of your choice. It’s important to note that just because you meet the lender’s requirements doesn’t mean you’ll qualify for the lowest interest rate you see on their website. Lenders determine your interest rate based on many of the eligibility factors listed above, such as credit score, credit history, debt-to-income ratio, and employment history. Lenders typically offer a range of rates for specific term lengths, and those with better credit standing and debt-to-income ratios typically receive the lower-end interest rates.
If you’re unsure whether you’ll receive the lowest interest rate a lender offers, prequalifying to receive an estimated rate may be the next step to take.* Prequalification is the process of submitting some basic information to the lender and allowing them to conduct a soft credit pull to determine an estimated rate. If you prequalify and aren’t happy with your rate, adding a cosigner who has a stronger credit score, credit history, debt-to-income ratio, or employment history may give you the ability to obtain the rate you want. Unless the cosigner carries these characteristics and thus appears to be a more qualified borrower to the lender, adding a cosigner alone will not lower your interest rate. If you have questions about whether you think adding a cosigner could help, reach out to your lender for more information.
How Much Money Could Adding a Cosigner Save You?
So, how much money could adding a cosigner save you when refinancing your student loans? It all depends on your specific circumstances, but let’s review a hypothetical scenario:
- Let’s say you currently have $50,000 in student loans with 15 years left on your repayment term at 7.25% APR. Your monthly payment is $456 per month and you’ll pay $82,080 over the life of your loan if you made all payments on time.
- You are looking to refinance $50,000 in student loan debt to a 15-year term. The lender that you plan to prequalify with offers rates ranging from 4-6% APR for 15-year terms. After prequalifying, the lender offers you an estimated rate of 6% APR.
- At 6% APR on $50,000 in student loans over a 15-year term, your monthly payments would be roughly $422 per month, and you would pay approximately $75,960 over the 15-year term if you made all payments on time. You’re already saving $34 per month and $6,120 over your loan term by refinancing.
- You decide to add a cosigner who has a stronger credit profile, debt-to-income ratio, or employment history, and the lender then prequalifies you at the lower-end interest rate of 4% APR.
- At 4% APR on $50,000 in student loans over a 15-year term, your monthly payments would be roughly $370 per month, and you would pay approximately $66,600 over the 15-year term if you made all payments on time.
- By adding a cosigner to qualify for the lower interest rate, you would save $52 per month and save $9,360 over the life of your loan.
- By refinancing and adding your cosigner, you’ve now saved $86 per month and will save $15,480 over your loan term compared to your original loan.
While this scenario is hypothetical, it does show that adding a cosigner who has stronger borrowing credentials to lower your interest rate could provide you with significant savings both on a monthly basis and over the life of your loan. The potential monthly savings may even make you consider switching to a shorter loan term to lower your interest rate and pay off your loans faster.
To wrap things up, you can essentially consider adding a cosigner when refinancing student loans as a “lifeline” to either meet minimum requirements to refinance, meet the requirements of a particular lender, or lower your interest rate and save money over the life of your loan. If you’re interested in refinancing your student loans, check out our Student Loan Refinancing Calculator to see what you could potentially save, then prequalify with ELFI in just minutes, without affecting your credit score.* ELFI offers some of the lowest student loan refinancing rates available and assigns every customer a Personal Loan Advisor to assist them through every step of the process and answer any questions they have – such as whether adding a cosigner will be beneficial.
Related >> Cosigners and Cosigner Release: What to Know
*Subject to credit approval. Terms and conditions apply.
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