Many students who have difficulty financing their college education will often ask their parents, grandparents or other relatives to cosign on a private student loan. Too often the knee jerk reaction is to say “yes!” Parents and grandparents feel that a college education is a great investment and are more than willing to help a relative. However, Co-signing a student loan can be disastrous if the student doesn’t pay the student loan back.
What Does Co-signing Mean?
Co-signing means that the parent, grandparent or relative is on the hook if the student defaults. As a result, Co-signing can put your credit score at risk, if the student loan borrower falls behind or even makes late payments.
We all hope the best for our children and hope that as soon as they get out of college they find a great paying job. Unfortunately, in today’s economy that isn’t always the case and, unfortunately, students often take on too much debt.
If the student loan borrower defaults it ruin your credit and, worse yet, a private student loan can’t be discharged in bankruptcy unless there is an “undue” hardship. Undue hardship discharges are rarely granted by bankruptcy judges.
What Should You Consider Before Co-signing a Private Student Loan?
There are three (3) considerations:
- Did the college student first apply for Federal Student Loans? Did you know that the Federal Student Loans do not require a cosigner and are not based on credit rating?
- Interest rates for Federal Student Loans are fixed. Undergraduate Federal Stafford Loans have a fixed interest rate of 4.66% if the loan was taken out between July 1 and June 30, 2015. Interest rates are fixed for the life of the loan.
Private Student Loan interest rates vary and can be between 9% and 13%.
- There are flexible income based federal student loan repayment programs. Very few private student loans have flexible repayment plans where the amount of the payment can change based on the borrower’s income and family size. The private student loan is generally a fixed annuity much like a mortgage payment.
Have You Looked at Alternative Loans or Grants?
Before Co-signing on a private student loan you want to make sure that the student loan borrower has exhausted all of their opportunities for Federal Student Loans and Grants.
Quite frankly, there isn’t anything wrong with a college student working through college and, if necessary, prolonging their graduation so that they can pay their tuition.
If that isn’t an option, Federal Grant PLUS and Federal Parent PLUS are available to parents if they can meet the credit background check. Under PLUS loan, the parent is obligated to repay the loan.
Some of the Practical Problems a Co-Signer Will Face
Unfortunately, some student loan borrower just won’t be upfront and tell the cosigner that they haven’t been making the payments. It is only when the cosigner starts getting calls after the loan has been defaulted that does the cosigner becomes aware of the problem.
And the problem has become bigger! By the time the loan is in default, loan penalties, interest, other fees and even attorney’s fees can be tacked on which can double or even triple a loan! It makes it very difficult for a student loan cosigner borrower to control their debt and credit if they don’t know about the status of the loan.
However, if you as a parent have taken out a PLUS loan, the bill will come directly to you and not the student. You are responsible for the payment.
PLUS loans have a flexible forbearance and deferment options if you have financial difficulty those safeguards are not available for private student loans.
What You if You Are the Cosigner on a Defaulted Private Student Loan?
You should contact the lender immediately and see if you can negotiate reduced payments or a lump sum payment.
If you have been sued don’t allowed a default judgment to be entered! If you ignore the lawsuit a judgment can be entered against you which will follow you for years. The default judgment will allow your wages to be garnished or even your bank account seized.
Don’t delay if you’re a private student loan cosigner! It is time to contact student loan attorney Nancy Cavey at 727-828-9955 and find out now what can be done before a default occurs.