Your money: Cosigning a student loan? Be prepared to pay
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[May 17, 2019]
By Beth Pinsker
NEW YORK (Reuters) - Is your college-bound
child a good credit risk?
Consider this very carefully before cosigning a private student loan.
Some 49% of private student loan cosigners over age 50 end up paying
some of that debt, according to data released in May by the AARP Public
Policy Institute. Half of them, mainly parents and grandparents of the
borrowers, voluntarily do so to help out. But the rest pay only when the
student defaults.
"Some people cosign and don't realize that they will be responsible
ultimately if student borrower does not pay," said Lori Trawinski,
director of banking and finance at the AARP Public Policy Institute.
The risks go beyond just having to pay bills. One missed payment will
tank credit scores of both the borrower and cosigners. Miss more and you
go into collections, which will damage all of your finances for years to
come.
It is very easy for months to pass in default if the student is trying
to hide what is going on, said Ken Ruggiero, president and chief
executive of Ascent Funding, a private student lender based in San
Diego.
"There is confusion about who owes the bill. Meanwhile, the calendar is
ticking by," Ruggiero said.
LOAN OPTIONS
Private student loans make up about $120 billion of the $1.5 trillion in
U.S. student loan debt, according to the AARP study. Almost all are
cosigned loans, because students rarely have the credit history or
income to qualify on their own.
At College Ave Student Loans, for instance, 96% of its $2 billion in
loans are cosigned.
Families typically turn to private loans to cover shortfalls after they
exhaust the limits of federal loans for students as well as their
savings.
Parents can also get federal Parent PLUS loans, which come with low
interest rates, very few restrictions, and some income-based repayment
options. But, according to AARP's data, more families turn to cosigning
private loans in students' names.
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Messages and artwork are pictured on the top of the caps of
graduating students during their graduation ceremony at UC San Diego
in San Diego, California, U.S. June 17, 2017. REUTERS/Mike
Blake/File Photo
"Both are pretty poor products in terms of protections and options," said Adam
Minsky, an attorney who focuses on helping student loan borrowers in both
Massachusetts and New York. That said, he recommends a Parent PLUS loan over
cosigning a child's student loan.
Interest rates are a key factor. The 2018 rate for PLUS loans was 7.6%, while
private loans vary. At Ascent, which has about $50 million in loans to date,
variable rates range from 4.23% to 13.23% and fixed options range from 4.98% to
14.16%, depending on your credit history and other factors.
Even Ruggiero said of Parent PLUS loans: "If you have bad credit, it's a
screaming deal."
Another point to consider before you sign a loan is consumer protection.
Borrowers can discharge a federal loan in case of a disability or death, Minsky
said. Private loans do not offer that option, and parents could be on the hook,
even if their child passes away.
Cosigners can ask to be taken off a private loan if repayment is going well. But
the process is not transparent or simple.
"Lenders have total discretion. Even if you meet requirements, they don't have
to go through with it," said Minsky, who has rarely seen it happen.
The easiest way to avoid bad loan choices is to pick a school the family can
afford.
"We need people to not have to rely on debt to finance education, and we need
more options that are cheaper," Minsky said.
(Editing by Lauren Young and Richard Chang)
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