6 things to consider before co-signing on a private student loan
Published 11:26 am Tuesday, September 20, 2016
By Alex Coleman
When it comes to education, parents, relatives and loved ones want to help out. Moreover, when a student has exhausted federal loan options and can only qualify for a private loan if they have help, many family members feel like they are obligated to co-sign to contribute to his future. In fact, 90 percent of private student loans are given to borrowers with a co-signer, signaling just how prevalent this trend is.
However, while you want your loved ones to succeed, co-signing on loans can be dangerous for your finances. Student loans are one of the most lasting forms of debt, meaning they are not easily discharged or forgiven, even in extreme circumstances. Before you put your name on any of the paperwork, make sure you understand and can manage all of the obligations that come along with being a co-signer on a private student loan:
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You are on the hook for the debt: When you co-sign a private student loan, you are responsible for ensuring the debt is paid on time and in full. If the student takes out more loans than he can afford or forgets to make payments, you will face the burden of that debt. If you do not realize that he missed payments, you could end up with damaged credit and calls from collections agencies. Even if you have your own debt or financial issues, you are still required to make the monthly payments if the student cannot. You should calculate the expected interest expenses before you sign the promissory note.
The number owed can change: While you might be comfortable co-signing for a relatively small student loan, such as $5,000, be aware that the amount can change. If the loan is deferred or entered into forbearance for graduate school or economic hardship, the loan can accrue significant amounts of interest at a high rate. If there are any penalties for late payments or defaulting on the loan, you will be responsible for those fees, too. The amount you owe can end up ballooning to much more than the original loan was for, putting you on the hook for thousands more than you expected.
Student loans cannot be discharged in bankruptcy: Unlike other forms of debt, such as credit card balances, private student loans cannot be discharged in bankruptcy. Even if your finances are in ruins, you have large medical bills or you lose your job, you will still owe on the loans.
Co-signing can impact other purchases: While you might not think much of adding your signature to a student loan application, the loan httpscan affect other purchases you make. If you plan on buying a car or applying for a mortgage, the student loan balance will show up as your debt, affecting whether or not you are approved and the interest rates you can get. If the student loans bring down your credit score, you can expect to pay more in interest. The lower credit score can affect other things too, such as your car insurance rates or a security deposit on an apartment.
It is nearly impossible to get removed: If you co-sign on a private loan, it is almost impossible to get your name eliminated from the debt. Lenders do offer co-signer releases, but the process is lengthy and rigorous. Typically, the loan needs to have 12-48 months of on-time payments before you are eligible for a release, and the student must be able to prove they have enough income and a good enough credit score to make the payments without you. If they are in a low-wage job after graduation and still have a low rating, you likely won’t be able to get out of your commitment. There have even been cases where the student has died, and the co-signer was still responsible for the loan. Do not enter into a co-signing agreement with the expectation you can remove yourself of the debt later on; chances are, you are stuck with the debt for the long haul.
Defaults are common: While you may think the world of your loved one or relative, it is common for young people to get behind on their loans and miss payments. High living expenses and low starting salaries make managing monthly payments difficult, leaving co-signers to pick up the slack. Keep in mind that nearly 30% of borrowers with student loans are in default; it is very possible that you could end up making the payments.
It is natural to want to help out friends or family as they pursue higher education and work to achieve their goals. However, co-signing on private student loans is a significant commitment with long-lasting consequences, potentially impacting your finances and credit score. Before you agree to serve as a co-signer, ensure you fully understand all of your responsibilities and that you can afford to pay back the debt if the student defaults.
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