A person might have a child, family member, or even a close family friend who is about to start college. They turned in their applications, they got accepted into their school of choice, and they got their financial aid award letter. BUT because their dream school’s financial aid award doesn’t completely cover the cost of attendance, they will need to borrow a private loan. So, they ask you for some help.
When the future college student asks an adult to co-sign a private loan, the adult may think that it’s no big deal. After all, they will be able to pay back the loan since they’ll have a degree in four years. Right? Not necessarily. While cosigning a loan for a future college freshman won’t always spell disaster, there are some things that a person needs to know before they sign the promissory note. This blog post will discuss some of the key issues that a person will need to watch for when a soon-to-be college student asks someone to cosign a student loan.
In order for parents to protect their credit score and their children’s financial future, careful consideration must be given to any situation involving cosigning a student loan. Many parents wish to support their children’s education endeavors, but there are certain things which must be considered before a final decision is made to cosign a student loan. The best way to decide if this is a viable solution for you and your family is to identify and discuss the benefits versus the risks and create a plan that will leave little or nothing to chance.
1. Ask them if they have any other options for funding –
If they do, ask them to exhaust whatever options they have at their disposal. All students should first apply for federal aid such as grants, scholarships, work-study, and federal loans. Not only can students get federal loans without a co-signer, but they come with protections such as the ability to defer payments if the student has financial problems in the future. However, the amount that a student can take out every year and over the course of their undergraduate education is limited.
Parents also have options when it comes to borrowing federal loans for their child’s education. They can take out Parent PLUS loans to cover any shortfalls of their child’s financial aid award letter. Unlike private loans, Parent PLUS loans have more flexible repayment features and the credit check process is less invasive.
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2. Don’t get fooled by low rates –
Since federal loans have fixed rates, borrowers will make the same payment amount every month. Private loans may have variable rates which can change at any time. As a result, the monthly payment on a private loan can drastically increase at a moment’s notice. However, some banks are starting to offer customers fixed-rate loans. If students must take out a private loan, they should consider these options. But they should also shop around at lenders like credit unions. Even some US states offer loan programs for undergraduate and graduate students.
Some private loans require the student borrower to pay while they are still enrolled in school. Federal loans give borrowers a six-month grace period that starts after they graduate or leave school. These things should be taken into consideration before making a decision.
3. Try to obtain a co-signer release –
Some private loans offer borrowers a co-signer release option. After the borrower makes a certain amount of on-time payments, co-signers can get removed from the loan. Getting a co-signer release isn’t always a piece of cake. The Consumer Financial Protection Bureau found that less than 10 percent of co-signers of private loans were approved for releases. To better your chances of getting that coveted release, keep track of all of the on-time payments that the borrower made. When the borrower meets the lender’s requirements, you can then request the release. Co-signers can also apply for a release when the borrower’s monthly loan payment comprises no more than 10 percent of their monthly income. If the lender sees that the borrower can comfortably make payments, they might be more willing to release the co-signer from the loan. Co-signers can also ask the borrower if they are willing to refinance with another lender, which can release the co-signer from responsibility for the loan.
4. Learn about their financial situation before you sign –
Co-signing a private student loan is a serious matter. If the idea of co-signing for a certain student troubles you, don’t sign. If the student needs a private loan that could mean that they can’t afford the school they plan on attending. You could give the student some other options for paying for school. You could loan them money and have them pay you back in installment payments. You could suggest that the student lives at home while they attend college. Many colleges and universities allow students to pay their tuition through an installment plan. The student borrower in your life could take advantage of that option.
Private student loans are one way to pay for college, but they aren’t the only way. Many experts say they’re not even the best way. Adults who get approached to co-sign for a loan would do well to go over all options for school funding with the borrower, examine the student’s financial life, and educate both themselves and the student on all of their private lending choices. At the end of the day, the co-signer is responsible for the loan if the original borrower can’t pay. When it comes to co-signing private loans, proceed with caution.
5. Risks versus benefits of cosigning a student loan –
Many students who apply for education loans will find that they need a cosigner in order to be approved for the loan. When a parent agrees to cosign a loan, they are taking full responsibility for the payment of the entire loan should the student be unable to repay the money to the lending institution. While it is true that this can be a risky venture, there are some benefits that are worth mentioning. A student loan that is cosigned by parents with a higher income and a positive credit history will result in a lower interest rate for the student, which means less total money borrowed. It also helps the student to establish his or her own credit score information, which is an important life step.
When listing the positive aspects of this arrangement, equal consideration must be given to its risks. The major risk associated with cosigning a student loan is the possibility that the student will be unable to make the loan payments. In this case, the cosigner has relatively few options as the late payments (or nonpayment) will show up as a blemish on their own credit report. The only way to save your own credit rating is to take over the repayment of the loan.
6. Repayment considerations –
It’s important to sit down with your child before cosigning a loan and discuss a repayment plan. The student should understand that if he or she cannot make one of the loan payments, it is vital that his or her parents be made aware of this as soon as possible. It should also be understood that the parents will have access to the account so that they can check to see if the payments are being made on time.
The next step is to create a hardship plan, in case the student ends up in financial difficulties that would prevent him or her from making timely payments. Perhaps the student can make part of the loan payment, and the parents make up the difference. After the loan has been repaid, the student can, at that point, begin making payments on the money owed to his or her parents. In addition, the parents may agree to take over the payments for six months until the student is back on his or her feet. Then when the last payment is made to the financial institution, the student must make six additional payments to his or her parents.
Naturally, each situation is unique, and one must weigh the risks and benefits based on his or her individual circumstances. However, if care is taken to discuss every detail, and ensure that nothing is left to chance, most likely terms can be reached that benefits both parties and makes everyone happy.
Advantage CCS can help your soon-to-be college student understand debt management and how to use credit wisely. We can work with you and your family before, during, and after the loan process to ensure that the entire family stays on the right financial path to good credit. Give us a call at 1-866-699-2227 or shoot us an email at [email protected] and ask about our student loan counseling options. We’re here to help!