Student Loan Co signer Warning
Thinking about co-signing for a relative in need of a college loan?
Do you know what you may be getting yourself into and the responsibilities you’ll take on?
We want you to make an informative decision on whether cosigning is the best decision or not.
During these tough economic times, it is not easy to qualify for lines of credit, specially if you’re a young adult with no credit history or a relatively bad credit. That is why many millenials are turning to their parents, grandparents or other family members for a hand. A recent survey of several 18 to 30-year olds by Experian Consumer Services, which provides credit monitoring services, shows that over two-thirds of them have used a co-signer in the past, and three-quarters say that they would definitely consider asking their parents or another relative to co-sign for them in the future.
The results of the survey show that millennials have needed co-signers for the following loans:
College loans: 35 percent
Residential leases: 32 percent
Car loans: 19 percent
Legal agreements for credit cards: 17 percent
Car leases: 11 percent
Home loans: 6 percent
The Co-Signing trend is also reflected on April’s report on student loans from the Consumer Financial Protection Bureau.
The report concluded that 90% of private student loans in 2011 had a co-signer. One issue noted by student loan borrowers was that even though the lenders said that co-signers could be removed from a loan after a specific number of timely payments, getting the lender to actually do it was a very complicated process.
What is worse than that, lenders frequently use the death or bankruptcy of the co-signer as a trigger to demand the immediate full repayment of the entire amount of the loan from the student borrower.
But even if it doesn’t come to such extremes, co-signing is not something to be taken lightly.
When you make the decision to co-sign for a loan, that debt will also appear on your credit report. You are not just a “back-up” borrower, you’re also someone who is fully responsible for the entire repayment of the loan. Co-signing for someone means you are agreeing to pay the debt in its entirety if the main borrower fails to do so, defaults on the loan, becomes disable or dies.
In positive news, the Experian’s survey, found that most borrowers with a co-signed loan were very responsible in making their on-time monthly payments. Only 8% net total of the co-signed contracts were shown in bad standing because of missed payments, late payments or by default.
When you decide to help your relative by co-signing a loan, it is important that you recognize the severity of your decision.
“It’s important to recognize that you’re making a high-risk decision, not just doing a good deed if you co-sign a loan,” says Susan Tiffany, director, personal finance for adults at the Credit Union National Association. “The idea is that you’re helping out your kids or your parents, but it has implications for you, too. You need to consider the fact that if someone needs a co-signer, it’s because they’ve already been denied credit on their own and are considered a high risk.”
In fact, Tiffany warns, that in certain states, some debt collectors can go after a co-signer before pursuing the primary borrower for a debt.
Becky Frost, senior manager of consumer education for Experian, offers the following tips for parents, grandparents or other relatives contemplating co-signing a student loan:
- Use discretion. Before you co-sign for anyone, be absolutely certain that he or she is capable of responsibly managing the account and will always pay bills on time.
- Have “the credit talk.” Explain how credit works. It’s important for the young person to understand that late payments, a maxed-out account or collections will affect both your credit scores and your ability to qualify for loans in the future.
- Stay in touch. It’s important to maintain constant communication with your child to ensure that payments are being made on time and in full. The lender is not required to notify the co-signer about late payments or a delinquency.
- Consider the timing. If you’re planning on applying for a loan for yourself in the next six months, it may not be a good time to co-sign for your child.
“If you do choose to co-sign a student loan, then you need to do some soul-searching and some pencil-sharpening so you know that you’re co-signing for an amount you can absorb if you would need to,” says Tiffany. “Make sure you’re aware of the status of payments and find a way to monitor them before things get completely out of hand. Each individual has to make a decision about whether to co-sign or not, but it’s important not to have any illusions about what you’re doing and the risk you’re taking.”