Deciding to refinance student loans as a married couple could be a smart move to improve finances, especially if one spouse has much better credit.
Refinancing and consolidating student loans may result in a lower interest rate, which saves money. This could help alleviate financial stress and allow you to reach other financial goals, such as buying a home, saving for vacations and saving for retirement. But, when your spouse is refinancing a student loan, should you cosign?
There isn’t a clear-cut answer. Consider the pros and cons of cosigning and decide whether cosigning is right for you and your relationship. Keep in mind that refinancing federal student loans into private loans means a loss in many benefits that only federal loans and the U.S. Department of Education offer. These include potential for federal loan forgiveness, income-driven repayment plans, generous deferment and forbearance options if you become unemployed or have an economic hardship, and an option to discharge loans for death or disability.
Pros of Cosigning for a Spouse
Increase chances of getting approved
Having a cosigner with a better credit history will increase the likelihood of getting approved. Generally, lenders want to see a cosigner with a low debt-to-income ratio, steady income, a history of making on-time monthly payments and a good credit score (at least 620). If you are stronger than your spouse in any of these areas, cosigning their student loans can help with eligibility.
Possibility for a better interest rate
Your new interest rate is generally determined by the income and credit of both the borrower and a cosigner. (Earnest also evaluates earning potential, education and savings). This means including your spouse’s income could help you get a better rate. Having a cosigner on the loan also reduces the lender’s risk, making private lenders potentially more likely to approve your application. With a lower interest rate, the loan will end up costing you less.
Working towards a joint goal
Sadly, student loans are causing marriage problems, with one in eight divorces blaming student loan debt. Refinancing a student loan together and helping a spouse with student loan repayment can potentially strengthen your relationship. Communicate and create a game plan together for tackling the student loan debt.
Could improve your credit
While mismanaging the payback of student debt can result in negative consequences, responsibly repaying the debt could actually improve your credit. Your payment history makes up 35% of your FICO score. Making on-time payments every month can raise your score.
Cosigner release available
Just like with private student loans, many student loan refinancing lenders offer cosigner release. After a specified period of time, the borrower may apply to release their cosigner. When this happens, the spouse who cosigned would no longer be tied directly to the loan.
Cons of Cosigning for a Spouse
Impacting future financial purchases
While it’s true that on-time payments can help improve your credit score, there will also be negative implications on your credit from a new loan. Tacking on this debt is going to increase your debt-to-income ratio, which could make it more challenging to get approved for a mortgage or car loan. Consider if it would be best for just one partner to take on the debt, so the other partner’s credit is not impacted.
Equal responsibility, even in divorce
Once you cosign a private student loan, including during refinancing student loans, you are just as responsible for repaying it back. You are equally responsible to make on-time loan payments, even if you get divorced and even if there is a prenuptial agreement.
A mistake means double trouble
If you’re having financial difficulties and end up missing a payment or going into default, this is going to impact both of your credit scores.