What To Know About Being A Co-Signer Of A Private Student Loan

May 16, 2018

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While many kids are looking forward to the summer, high school graduates are preparing to make the jump into college and that usually means navigating through the world of student loans. Some tuitions have risen beyond the maximum loan amounts offered by federally backed loans, which means you might be thinking of going to a private lender to borrow money. For a young person with little or no credit history, it will require a loan co-signer and that co-signer most likely will be you. Having a co-signer improves your chances of approval. Both the borrower and co-signer’s credit histories are evaluated, so the loan could get a more favorable interest rate. But that puts a co-signer in a tough spot because guaranteeing someone else’s loan carries major risks. There is no deferring or grace period which mean payments most likely will be due within 30 days of the loan approval. Remember the co-signing your name to the loan is the same as taking the loan out yourself. That means the loan will show up on your credit report. And if the borrower doesn’t make payments, you are equally responsible for it and your credit score takes a direct hit. A loan can go into default for even one missed payment meaning the entire loan comes due. Make sure to search for loans that come with a co-signer release provision. After a number of on-time payments—typically two years, or when the primary (student) borrower achieves a specific credit score, you might be able to remove your name from the loan. The release can be tough to get. According to the Consumer Financial Protection Bureau, less than 10% of borrowers who apply for a co-signer release succeed. To insure you qualify for the program, sign up for automatic payments so you will never be late and only apply for the release when the monthly loan payment is 10% or less of the borrowers monthly gross income.  If you’re uncomfortable co-signing, don’t do it. If a student needs a co-signer, it could be that the student is borrowing more than he or she can afford. Consider other options.

SOURCE: Consumer Reports

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