All You Need to Know About Third-Party Guarantor and Co-Signer For Education Loan

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Risha Sinha

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Nowadays, students opt for education loans in order to fund their education. When they go out for taking an education loan, the bank will review their credit history for checking their capability to repay the loan amount given by the bank. Since a student does not have a credit history, he/she needs a guarantor or co-signer for applying for an education loan.

What is a Third Party Guarantee?

Banks often demand a guarantee from the borrower in order to ensure their loan repayment.  In a guaranteed loan, a third party guarantees debt obligation if the borrower fails to repay the education loan he has taken. Generally, the loan amounts above INR 7.5 Lakhs require a loan guarantor for getting the education loan from banks like Indian Bank.

A third-party guarantor will be eligible for Education Loans in the following cases:

1. The credit score of the guarantor should be good and he/she is also expected to have sufficient income to cover loan repayment. 

2. The age of the guarantor must be above 18 years and he/she should also be a citizen of India.

A guarantor is basically a close relative/acquaintance of the borrower. He/she will put some of the assets as collateral and if in case the borrower is not able to pay back the money during the repayment period, he/she owes money to the bank. If the guarantor is also unable to repay the money, then the collateral provided by him will be used to cover up all the remaining costs.  

A term used to refer to something that a borrower has promised to the lender as a backup in case the borrower is unable to repay the loan amount. If the borrower is unable to pay back the loan, the lender has the right to take over the assets promised in the form of collateral. Collateral can be a property, future paychecks, LIC premiums and many more.

What is a Co-signer? 

A co-signer is a co-owner of the education loan taken by a student. A co-signer and guarantor are quite similar to each other but both are used in different scenarios as a guarantor does not have a claim over the education loan whereas the co-signer does have. When a borrower does not have a good credit history i.e. a good CIBIL Score, the banks like PNB ask for a co-signer.  The higher the credit score of the borrower and the co-signer, the more likely the education loan will be approved.

However, if the borrower makes on-time payments a certain number of times then the co-signer can also be released from the bank. The co-signer will be released only if the following criteria are met:

1. The borrower has made 12 on-time payments consecutively and has become a trustworthy borrower.

2. The borrower has maintained a satisfactory CIBIL score by the end of 2 years. 

Steps for releasing co-signer:

1. Contact the lender in order to understand the entire procedure and to know whether you are eligible for the release of the co-signer or not. 

2. Be ready with all the important documents such as on-time payment details, co-signer detail forms, etc. 

3. Apply for the release of co-signer in your respective bank.

4. Co-signer can also be released through student loan refinancing. If the bank rejects the release of co-signer than you can go for refinancing your education loan so as to benefit from the new existing rates of interest and release your co-signer from the loan. 

So, having a guarantor and co-signer makes it easier for a student to get an education loan instantly. Moreover, it also reduces the risk of repayment for banks.