Most student loan co-signers don’t seem to understand exactly what the process entails. When I talk to co-signers and read comments on social media and online consumer boards, they feel confused. Co-signing for any loan, including a student loan, is a very high-risk business.
There are many reasons why co-signing is a risk. Some figures are parents who, in their 70s and 80s, are still paying for student loans for children. Parents struggle with ill health, unexpected job loss, divorce, death of a spouse or forced early retirement and fall behind on payments. When this happens, the loan balance is extended when unpaid amounts are added to the balance.
In the United States, students who do not qualify for a school loan will be required to use a student loan cosigner. This student is considered high risk because the loan-to-debt ratio is high from previous debt or has exhausted available financial aid. They will also be asked to co-sign if they have bad credit or low credit scores.
For most federal student loans, a cosigner is optional. However, if you don’t meet the credit and income requirements, a cosigner is usually required for private student loans.
The student is considered high risk for borrowing and loan repayment if a school is also too expensive. If the student has used most of their financial aid eligibility on a previous degree, a private loan cosigner may be required. At this point, the student may have to repay loans for two degrees, which puts the student at a very high risk of default.
If the previous student fails to make payments, payments will be received by the co-signer. When a student does not finish a degree, the loan received must be repaid.
WHAT ISSUES CAN PREVENT A BORROWER FROM MAKING REGULAR PAYMENTS?
When a graduate has a death, accident, or long-term illness, they may not be able to make payments and may default on a student loan. This is something that cannot be predicted.
They may have a significant reduction in their income due to disability payments. Or, the student turns out to be heavily in debt, or has a habit of overspending, they may need help with the payments. The seemingly responsible student turned out to be financially irresponsible.
In all of these scenarios, if the graduate cannot make the loan payments, the student loan cosigner will be forced to make the payments. Force means that the cosigner’s check or taxes can be garnished if the student fails to make the payments.
Studies show that at least 25% of former students do not make payments on co-signed loans. The default rate, including non-cosigners, is 40% on all student loans. So beware of high risk as a student loan co-signer. They are high because, at any time, a former student can have a catastrophic event that can prevent them from making their loan payments.
WHY WOULD SOMEONE ASK A PARENT OR RELATIVE TO SUBSCRIBE?
They would ask why the parent or a relative has good credit and a decent income. This does not mean that they can afford to pay for their child’s or relatives’ loans in the event of default. But, because of the relatives’ credit history, they will allow them to co-sign anyway.
What if someone with good credit or good income, just paying bills, co-signs? The co-signer can also default if it has a catastrophic event.
When a graduate suffers a death, accident or long-term illness, they may not be able to make payments and may go bankrupt. This is something that cannot be predicted.– Ms. Financial knowledge
The co-signer is considered the person of last resort. If they go bankrupt, their credit score will drop and the lender can garnish wages. A cosigner can lose a good credit rating if they can’t make the payments after the graduate defaults.
WHAT MAKES A STUDENT LOAN CO-SIGNER A HIGH RISK BUSINESS?
According to AARP, co-signers are responsible for paying for their child or relative’s education by taking out a PLUS loan – federal money that parents borrow. Or they co-sign other loans from private lenders. AARP is the seniors’ advocacy group. About 25% of co-signers pay off their child’s loan because the student defaults.
Lenders advertise that co-signers can be released from their liability. The Consumer Financial Protection Bureau 2015 found that 90% of those who applied for a discharge from their loan were denied.
WHAT ARE ALTERNATIVES TO PROTECT THE STUDENT, PARENTS AND RELATIVES FROM CO-SIGNING?
AFFORDABLE SCHOOL: First, the student should first choose an affordable school. Community colleges have various Associate of Arts degrees that will get you good jobs. Some are computer technician, graphic design, web design, vocational nursing license, x-ray technology, cardiovascular technology, real estate, accounting, physical therapy assistant, work assistant and 2 year nursing degree. Many states allow students to transfer to a 4-year college after community college and take the last two years toward a bachelor’s degree.
Well-paying research careers with an associate of arts degree, where most can use a Pell grant. After a community college, focus on applying to state-funded schools if you need a bachelor’s degree. A student who defaults on a loan after graduation may also have their check garnished for non-payment.
RETURN OF EMPLOYERS’ CONTRIBUTIONS: Many current employers give tuition reimbursement. Contact a current employer or someone you are interested in.
PEL GRANT: Apply for FAFSA (FREE APPLICATION FOR FEDERAL STUDENT AID), start your application online and focus on getting a Pell Grant. if not, there are other options.
About 25% of cosigners pay off their child’s loan because the student failed to pay as promised. -MsFinancialSavvy
SAVING USE: Ask a parent or relative if they can borrow from their savings. And you pay them after graduation. Prepare a legally binding notarized loan agreement to enforce payment later.
GOOD RELATIVES: Ask a well-to-do relative if they can fund your education as a gift. Prove to them that you’ve gotten good grades in the past, work a job, and are motivated. Be willing to show them your grades after each semester.
SCHOLARSHIPS: Apply for every scholarship you qualify for, no matter how small. They will add up. Some fields have many scholarships available, such as nursing, engineering or computer science. Look for occupations that are in high demand with scholarships available.
CREDIT CARD USE WITH RESPECT TO: Find out if you can use a credit card to charge tuition. Then during the semester, ask your parent or relative to pay the entire principal and interest month after month, plus more to pay off the bill by the end of the semester. The student can help with this payment by working. Do this over and over each semester until the tuition is quickly paid off by graduation.
CO-SIGNATURE: It should be the absolute last resort, if nothing else. Co-signing a student loan is an extremely high-risk venture. Once a person co-signs on a student loan, that loan becomes both the co-signer’s and the student’s loan. Because if the student fails to pay, for any reason, suffering, disability or long-term illness, or becomes irresponsible, the cosigner will be forced to pay.
STUDENT LOAN CO-SIGNATORY SUMMARY
Student loan products come in a variety of packages and can be very complex. More complicated student loans require a student loan co-signer. The message here is for the cosigner to know that there are many ways to default on student loans. And, there are many more options available before you consider co-signing.
As a co-signer parent or relative, the liability is the same as if the loan were theirs. Explore the many options for financing a student’s education before considering a cosigner loan. Then think hard and long-term about whether acting as a student loan co-signer is worth the high risk.
