Should I remain as a cosigner on a loan or remove myself to lower my debt?

The NFCC often receives questions from readers about their money challenges. We answer your common questions in our Ask an Expert series, in hopes of helping readers find the information they need.

This week’s question:

I am a cosigner on a student loan with my son. He is now able to take the debt on himself. I am wondering what the effect would be on my credit score if he were to refinance and remove me from the loan.

He has been paying for several years but has a $47K balance. His on-time payment status affects my credit positively, but would reducing my debt by $47k outweigh those benefits? I don’t want to do anything that would negatively impact my credit score. Thank you.

Answer:

Being released as a cosigner on a student loan has its pros and cons. When you’re released as the cosigner, you’re no longer legally liable for repayment. In addition, you don’t have to worry about the potential damage to your credit if your son falls behind on payments, and you’re less likely to be denied future loans based on the amount of debt owed on the student loan.

However, there is a downside to consider. Being removed as a cosigner from a loan could potentially hurt your credit scores. How much your scores are impacted depends on the details of your credit profile.

How do student loans impact your credit?

Like any installment loan—or a loan paid back through scheduled monthly payments—having a student loan can help you establish payment history on your credit record, even if you’re just the cosigner. But it can also have a negative impact on your credit. Here’s what can happen:

• Payment history: On-time payment history is the most significant factor that determines your credit scores, so when loan payments are made each month, your scores can steadily grow.
• Debt-to-credit ratio (DTC): Your credit utilization ratio, or DTC, is the second most important factor influencing your FICO scores. With installment loan debt, this ratio is based on how much of the original loan amount is still owed, and the lower the balance the better. So if the loan balance is high, removing yourself could have a positive impact on your scores.
• Mix of credit: Having a mix of different types of credit, such as car loans, mortgages and credit cards, helps your credit scores. However, this has less weight on your scores than other items. Just beware that if you remove your only loan, or your only account that’s actively adding positive payment history, you may see your scores drop.

Getting released as a cosigner

It’s not always an easy process to get released as a cosigner, especially from a private student loan servicer. Each lender has its own criteria and process for removing cosigners, and some don’t even allow it. So the best place to start is to contact your lender to find out your options. They may include:

• Co-signer release: An agreement to release the cosigner’s liability after a certain number of payments are made.
• Loan refinancing: Have the student borrower take out a new loan to pay off the old debt and alleviate you from responsibility.

If you can be removed from the loan, your credit scores may drop, but don’t fret. You can always improve your credit scores. For tips on how to gain points, browse our blog. You can also schedule a free appointment with a certified financial counselor from one of our trusted agencies, either online or by calling 800-388-2227.