With
the total amount of outstanding student loan debt surpassing $1.5 trillion,
many borrowers are beginning to feel the consequences of their burdens — and
that doesn’t just mean students.
When
a student doesn’t receive enough financial aid
to fund their educations, their families often turn to private loans to help
cover the remaining costs. Parents are commonly asked to cosign on loans in order
to get their child a better rate, or approved altogether. That willingness to
help could be detrimental.
“Would
you give a teenager who is irresponsible the keys to your financial future?”
That’s how Mark Kantrowitz, student loan expert and vice president of research
at Savingforcollege.com describes the risk in cosigning on a child’s student
loans.
Reasons
why parents probably shouldn’t cosign
Only private student loans can
utilize a cosigner — Federal student loans do not allow the practice. With
a cosigner, a student with low or no credit can be offered a better rate or
increase the chances of seeing their loans approved. Helping a child qualify
for a way to pay for their education may seem like a given for most parents,
but it comes with immense risks.
Here are some important reasons why parents
may want to think twice before cosigning on their children’s private student
loans, according to Kantrowitz.
Cosigners are financially
responsible if a student defaults on the loan
Cosigning
on any type of loan means you are now on the hook for the balance, should the
primary signer fail to make payment. And that doesn’t mean the student loans
have to end up in default in order for the lender to come after a cosigner,
either.
“Actually,
as soon as the student borrower is late with a payment, the lender will seek
repayment from the cosigner,” Kantrowitz says.
Around
two-fifths of general loan cosigners end up repaying the debt, according to
CreditCards.com, a Bankrate sister site. If you aren’t capable of
repaying the student loan balance entirely on your own, this could cause
serious financial distress.
The risk of damaged credit
Cosigning
on a private student loan means the loan balance will show up on your credit
report. Considering debt-to-income is a major factor in determining a credit
score, the large balance can hurt your score.
Kantrowitz
also notes that a delinquency won’t only hurt the student — it’ll hurt the
cosigner, too.
“Delinquencies
and defaults will show up on the credit history of both the student borrower
and the cosigner, ruining the cosigner’s credit, not just the student’s,”
according to Kantrowitz.
Once
your credit is damaged, it will be harder to get approved for good rates on
credit cards, auto loans or mortgages. The implications of poor credit stretch
far beyond just a low number.
There are no financial
benefits for the cosigner
While
a parent may be helping a child invest in their future, they won’t receive any
direct benefits from cosigning on the student loans.
“All
of the benefits — qualifying for a loan, getting a lower interest rate — are
received by the student, not the cosigner,” Kantrowitz says.
Seniors facing student
loan debt put their retirements at risk
Should
any of the private student loans end up in default, the affected cosigner could
face an unstable financial future.
In
total, Americans who are 60 years old and over owe $86 billion in student loan
debt. That number has surged by 161 percent since 2010, as reported
by the Wall Street Journal.
Should
retirees be unable to repay loans in default, they face an alarming realization
in that their retirement will be put at risk. More than 40,000 people aged 65
and older in 2015 faced garnished Social Security benefits because of defaulted
student or parent loan debt, the Wall Street Journal reports.
Tips for parents who cosign on a child’s
student loans
After
considering all of the risks, some parents still might make the decision to
cosign on a child’s student loans as every situation is different. While
cosigning on any type of loan can have dire consequences, cosigners have rights,
should the loans end up in default.
Seek a cosigner release
Under
this agreement, the cosigner can be freed from financial responsibility after
the primary borrower meets certain requirements. For example, a cosigner can be
released from the financial responsibility of a loan after the primary borrower
makes a certain number of consecutive payments that are all on time.
Those
seeking a cosigner release should contact their lender for more information and
to create a plan. The lender will likely ask for proof of your income and
creditworthiness, in order to determine eligibility.
Consider refinancing
If
you’re unable to be granted a cosigner release, refinancing the loans might be
a good idea. In doing so, you will be able to have your name removed from the
balance entirely.
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