Most student loan co-signers don’t appear to understand exactly what the process means. 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 venture.
There are many reasons why co-signing is a risk. Some evidence is the parents who in their 70s and 80s, still pay for kids’ student loans. The parents get into trouble with bad health, unexpected job loss, divorces, death of a spouse, or forced early retirement and fall behind on payments. When this happens, the loan balance expands when the unpaid amounts are added to the balance.
In the United States, students who do not qualify for a school loan will be asked to use a student loan co-signer. This student is considered high-risk because their loan-to-debt ratio is high from previous debts or they exhausted available financial aid. Also, they will be asked for a co-signer if they have bad credit or low credit scores.
For most federal student loans, a co-signer is optional. But, if you don’t meet the credit and income requirements, a co-signer is usually required for private student loans.
The student is considered high risk for lending and paying back a loan if a school is overly expensive also. If the student has used most of their financial aid eligibility on a previous degree, they may be asked for a co-signer for a private loan. At this point, the student may have to repay loans for two degrees, which makes the student very high risk of default on payment.
If the past student does not make payments, the payments will be taken from the co-signer. When a student does not finish a degree, the acquired loan must still be paid off.
WHAT ISSUES CAN PREVENT A LOAN HOLDER FROM MAKING REGULAR PAYMENTS?
When a graduate has a fatality, accident, or long-term illness, they may be unable to make payments and can default on a student loan. This is something that cannot be predicted.
They may have a significant decrease in income due to disability payments. Or, the student turns out to be in heavy debt, or has a habit of overspending, may need help making the payments. The student that appeared to be responsible turned out to be financially irresponsible.
In all these scenarios, if the graduate cannot make the loan payments, the student loan co-signer will be forced to make the payments. Force means the co-signers check or taxes can be garnished if the student does not make the payments.
Studies show that at least 25% of previous students do not make loan payments held with co-signers. The default rate, including non-co-signers, is 40% on all student loans. So, beware of the high risk as a student loan co-signer. They are high because, at any time, a past student can have a catastrophic event that can prevent them from making the loan payments.
WHY WOULD SOMEONE ASK A PARENT OR RELATIVE TO CO-SIGN?
They would ask because the parent or a relative has good credit and a pretty good income. This does not mean they can afford to pay for their child or relatives’ loans if they default. But, because of the relatives’ credit history, they will allow them to co-sign anyway.
What will happen if someone with good credit or good income, barely paying bills, co-signs? The co-signer may default if they have a catastrophic event, also.
When a graduate has a fatality, accident, or long-term illness, they may be unable to make payments and can default. This is something that cannot be predicted. -MsFinancialsavvy
The co-signer is considered the person of last resort. If they default, their credit score will drop, and the lender can garnish wages. A co-signer can lose a good credit rating if they can’t make the payments after the graduate defaults.
WHAT MAKES STUDENT LOAN CO-SIGNER A HIGH-RISK VENTURE?
According to AARP, co-signers are responsible for paying for their child or relatives’ education by taking a PLUS loan – federal money parents borrow. Or they are co-signing for other loans from private lenders. AARP is the advocacy group for senior citizens. About 25% of the co-signers are paying off their child’s loan because the student failed to pay.
Lenders advertise that co-signers can be released from their responsibility. The Consumer Financial Protection Bureau 2015 found that 90% of those who applied to be removed from their loan were rejected.
WHAT ARE ALTERNATIVES TO PROTECT THE STUDENT, PARENTS, AND RELATIVES FROM CO-SIGNING?
AFFORDABLE SCHOOL: First, the student should choose an affordable school first. Community colleges have various Associate of Arts degrees that will get good jobs. Some are computer technician, graphic design, web design, licensed vocational nursing, X-ray tech, cardiovascular tech, real estate, accounting, physical therapy assistant, occupational assistant, and 2-year registered nursing degree. Many states allow students to transfer to a 4-year college after community college, and do their last two years for a bachelors’ degree.
Research careers that pay well with an associate of arts degree, where most can use a Pell grant. After a community college, concentrate on applying to state-funded schools if you need a bachelor’s degree. A student who defaults on a loan after graduation can also have their check garnished for non-payment.
EMPLOYER TUITION REIMBURSEMENT: Many current employers give tuition reimbursement. Check with a current employer or one you are interested in.
PELL GRANT: Apply for FAFSA (FREE APPLICATION FOR FEDERAL STUDENT AID), start your application online, and focus on getting a Pell Grant; if not, other options exist.
About 25% of co-signers are paying off their child’s loan because the student failed to pay as promised.
USE SAVINGS: Ask a parent or relative if they can borrow from their savings. And you pay them back after graduation. Prepare a legally binding notarized loan agreement to force payment later.
WELL-TO-DO-RELATIVE: Ask a well-to-do relative if they can finance your education as a gift. Prove to them that you have 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 a lot of scholarships available such as nursing, engineering, or computer science. Search for careers that are in heavy demand with available scholarships.
USE CREDIT CARD WITH RELATIVE: Find out if you can use a credit card to charge tuition. Then, during the semester, ask your parent or relative to make the principal and interest payment month by month in full, 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 tuition is paid off quickly by graduation.
CO-SIGNING: It should be an absolute last resort, if at all. Student loan co-signing is an extremely high-risk venture. Once a person co-signs for a student loan, that loan becomes the co-signers loan as much as the student’s. Because if the student does not pay, for any reason, hardship, disability, or long-term illness, or becomes irresponsible, the co-signer will be forced to pay.
SUMMARY OF STUDENT LOAN CO-COSIGNER
Student loan products come in various packages and can be very complicated. The most complex of student loans require a student loan co-signer. The message here is for the co-signer to know that there are many ways to falter on student loans. And, there are many more options available before considering co-signing.
As a co-signer parent or relative, the responsibility is the same as if the loan was theirs. Explore the many options for funding a student’s education before considering a co-signer loan. Then, think hard and long if acting as a student loan co-signer is worth the high risk.