Parents Beware – What You Need To Know Before Co-Signing a Student Loan

The number of private loans with co-signers has increased from 67% in 2008 to 90% last year, according to Consumer Financial Protection Bureaus. The bad news is that four in ten young graduates fail to pay back their debts. An equally bad news, according to the bureau’s report,  is that 90% of parents who co-signed their children’s student loan and who later requested to be released from that agreement were rejected by lenders.

So, parents, before co-signing a student loan it’s important to understand what it involves. Co-signing a loan means that you are vouchsafing to pay the loan yourself in case the borrower fails to pay back. The primary benefit of co-signing for your child is that you can help him get the credit he needs for his education.

But you should understand that as a co-signer you agree to be held responsible in case the borrower fails to pay or misses a payment. By co-signing you are giving the creditor the full right to come after you because you decided to be accountable, in some way, for the debt. While this may be a big disadvantage to co-signing, it’s still hard to say no to your child when he comes asking for help in getting the credit he needs for a better future.

So before making that important decision, here are some of the important things you need to know about co-signing a student loan:

  1. Make sure your child has exhausted all the federal loans available for him before turning to private loans. Unlike private student loans, federal loans don’t usually require a co-signer.

A lot of students don’t take full advantage of the government-backed loans. There are bigger Stafford loans available for undergraduates and another program for graduate students. The thing is if you really cannot afford to pay for college without loans, ask your child to get some federal student loans.

  1. In general, federal loans have better terms than private loans. Not only do they have lower interest rates, they also have more flexible payment options. The Consumer Financial Protection Bureau reported that some borrowers of private loans have reported being in distress because of the limited or no options for forbearance, deferrals or interest-rate changes.

Experts are saying that even if some private loans do offer forbearance or deferment options, they are usually limited to a few months and may have some monthly fees.

  1. Interest rates for private loans are often variable, which means it could increase before a loan is settled in 10 or 20 years. According to Mark Kantrowitz, publisher of a student-loan website in Cranberry Township, Pa. the average private loan right now is around 9% to 10%, but during an economic recovery it could rise up to 5-6 percentage points.
  2. Your credit history is at risk of being blemished. Anytime the primary borrower misses a payment, the creditor can come after you, the co-signer. If you also cannot pay the loan, then it will go into default, which isn’t great for your credit record.

Of course, this doesn’t mean that your child is not responsible enough to pay back his loans. But there are statistics showing that most of our young graduates today are either unemployed or underemployed, making them unable to make payments for their student debts.

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