Today, many students turn to private lenders to help cover the cost of college. Unfortunately, private student loans don’t carry many of the same protections as federal student loans. As a result, you should be aware of the risks associated with acting as a co-signer for these types of loans.
According to the Consumer Financial Protection Bureau, approximately 90% of all private student loans were co-signed in 2011 (Source: Consumer Financial Protection Bureau, Mid Year Update on Student Loan Complaints, April 2014). Private lenders often require a co-signer if a borrower has little or no credit history. In addition, having a co-signer often allows a borrower to obtain a lower interest rate for a loan.
Some points to consider
- When co-signing any loan, you need to be aware that as co-signor, you are being asked to guarantee the loan. In other words, if your son or daughter doesn’t make the loan payment, the lender can go after you for payment of the loan. Depending on the loan terms, a lender can even demand full payment of a loan from a co-signer if the borrower misses just one payment. In addition, a lender can attempt to collect a loan that is due by using traditional debt collection methods, including wage garnishment.
- Before you co-sign a loan, you’ll want to consider whether you will be able to afford to pay the loan if your child is unable to make the loan payment. In addition, you should find out how co-signing the loan will impact your current creditworthiness.
- Finally, if you end up co-signing a loan, you should also find out whether the loan document contains a provision regarding automatic defaults or “auto defaults.” An “auto default” situation arises when the co-signor for a loan dies or declares bankruptcy and the lender demands the full amount of the loan to be paid back immediately by the borrower. If the loan has an “auto default” clause, your child should be fully aware of the possible consequences and take steps once he/she has graduated and is in repayment to pursue a co-signer release for the loan.
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