Stop and Think Before Cosigning College Loans
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UPDATED: Oct 31, 2012
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Getting an education has become more expensive due to increases in tuition and college expenses. As a result, many students turn to college loans in order to help finance their education. While it is all well and good that young adults seek to obtain an education, which can lead to a rewarding career and fuller life, it does not mean that all applicants are eligible to borrow college loans. Borrowers with poor credit histories often turn to cosigners in order to bolster their efforts at being approved for a college loan.
The act of cosigning allows otherwise ineligible applicants to borrow money by distributing liability amongst both the borrower and the cosigner. Naturally, young adults with minimal credit histories benefit from cosigners who join them in their college financing applications.
Signing Onto Debt
Unfortunately, cosigners are agreeing to take on college debt that has inflated greatly over the years as revealed by a number of statistics.
In 2011, 66 percent of the graduating class finished their education with college debt, according to a report from the Institute for College Access and Success. The average amount owed by these graduates was $26,600, which was up 5 percent from 2010. But even more surprising is the fact that the Consumer Financial Protection Bureau reported over 90 percent of those private college loans had cosigners. That number is 67 percent greater than the number of cosigners seen 3 years prior.
These numbers are only worsened by the fact that young graduates make up the largest portion of the unemployed in the ongoing recession.
As a result the cosigners—usually parents and grandparents—are held liable for the debt they cosigned.
Regardless of these statistics, many people will continue to cosign financing. Before agreeing to cosign a college loan, family members should stop, think, and evaluate the situation before proceeding.
Thoughts to Consider
Cosigners should first ask the borrower if he or she has exhausted all federal options. Federal student loans almost never require a cosigner in order to borrow money. Young adults, due to their excitement for college and their inexperience with financing, often fail to max out their government-backed options which are far more accommodating than private financing for college.
Unlike federal options, private student financing can have variable interest rates. This can make them difficult to repay if interest rates rise. Federal student financing, on the other hand, is always at a fixed interest rate (so long as it’s been originated after 2002). High interest rates raise the amount of debt that borrowers and cosigners owe, making repayment potentially difficult.
There are far fewer repayment options for cosigned private college loans. While federal student loans, which, again, do not require cosigning, feature a large amount of forbearance and deferment options, private college loans are the opposite. Private lenders are known to be notorious for having few, if any, options to assist borrowers and cosigners who are unable to meet their monthly payments. When private college financing does feature assistance options, those are typically only limited to a few months and may even include additional fees.
Since many graduates are unemployed or underemployed, they are often unable to make monthly payments in full on their college loans. As a result, cosigners fall into lenders’ sights and are held legally responsible for the debt. Lenders are not shy from using phone calls, debt collectors, and even court-ordered wage garnishments in order to reclaim the debt they are owed from either a borrower or a cosigner.
In the event that cosigners themselves become unable to repay the student loans they cosigned, they too will face an uphill battle in trying to discharge them. Unless both the borrower and cosigner can prove that their college loans are an “undue hardship,” it is impossible to have them discharged given our country’s current bankruptcy laws. Bankruptcy judges across the country almost universally side with lenders. On top of that, attempting to discharge student loan debt can prove to be expensive since it takes longer than conventional bankruptcy.
Hopefully, these reasons are strong enough to give pause to any potential cosigner before pen meets paper. While it is commendable to help a child or grandchild obtain a college education, it is incredibly difficult to handle private loans once defaults, high interest rates, and penalty fees take hold. Consigners and borrowers should look out for one another when “shopping around” for college financing. It is strongly recommended that cosigning only happen after exhausting all federal student loan options. This is one mistake that can prove costly on a gargantuan scale for both the borrower and the cosigner.