You’ve done the math. You’re spending way more than you anticipated paying these student loans back. When you signed for them, the interest rates weren’t too much of a concern because you didn’t have to pay them back quite yet. Now that you’re out of school and actively working, it’s the time to consider refinancing.
Most of us with student loans don’t have a lengthy credit history. Heck, some of us mismanaged our money in our youth and have some dings on our credit reports. Obviously, neither of these things make you a prime candidate for great rates through refinancing. Not all hope is lost though: finding a cosigner with a long and healthy credit history can help you qualify for lower rates.
Non-Spouse Cosigner
The first step you’ll want to take is to determine who would be in a position to cosign. Most people approach a parent or family member. Having them cosign is essentially them backing you to a lender. Their credit profile will be used to determine the rate and their credit would also be on the line if you don’t pay.
You’ll want to be prepared about why you’re asking them to cosign.
- Get out of debt sooner – With their good or excellent credit score, along with the length of their credit history, they’re likely to get a much sweeter deal which will save you thousands. For example: You took out a 10-year $50,000 loan at a 7% interest rate. If you then refinance with the help of a cosigner and your new interest rate is 3.5%, you’ll save $10,333 over the life of the loan.
- Get to a manageable budget – By refinancing using you can considerably lower your monthly payment on loan. If this is your main goal, consider variable rate loans and longer-term loans. Let’s face it, life is just a little easier when you’re not as worried about money. You’ll have a little extra money in your pocket, and you’ll be saving even more in the long run.
- You act financially responsible – It doesn’t hurt to make a case for yourself by showing that you can and have been paying your loans back at the higher interest rate. This may ease some of the concern a potential cosigner may have about a default.
Spouse as Cosigner or Joint Applicant
Finances are one of the main strains on a relationship, and reducing your debt burden with the help of your spouse can only strengthen the marriage and your relationship while you’re starting your life together. Money can be saved for purchasing a home, paying for your children’s education, vacation, or even retirement. It also doesn’t hurt to feel more unified as a couple.
There are several reasons why this makes sense:
- Savings for the family – If your spouse has a better credit score than you then the family collectively can save potentially thousands of dollars in interest payments or reduce monthly payments considerably. As an example, if you have a 20-year loan of $50,000 at a 5.0% interest rate as a solo borrower, even a slight lowering of the interest rate from 5.0% to 4.5% by having your spouse as a cosigner will save the family $6,630 over the life of the loan.
- Power of combined income– Sometime, the benefit doesn’t come from your spouse’s better credit score but from using the combined household income. Some online loan marketplaces such as Lend-Grow will even allow you to use your spouse’s income without adding them as cosigner so long as proof of marriage and spouse’s income can be verified.
- Simplify finances – Additionally, if both you are your spouse have student loans, combining student loans with refinancing will greatly simplify your life. Now, you won’t be able to consolidate your federal student loans together, but you can refinance them together. If you combine your loans, you’ll have only one payment to worry about, reducing the risk of a missed payment and late fees.
Here’s the question that no one wants to ask… what if we divorce? It’s important to know that untangling loans is costly and difficult. It’s even more important to know that financial health is key in a lasting relationship. You’ll come out stronger in the end, and more prepared to make financial decisions together in the future. Remember you got married for a reason. You’re building a life together, and you’ve already made the ultimate commitment. Combining finances is a big step, and in this case, it’s a step that will leave you with a little more money.