Co-Signing Student Loans: The Pitfalls and Repercussions

Monday, January 16, 2017

Students currently applying to matriculate at a university might not have the funds to do so. With college tuitions increasing exponentially every year, this leads many prospective students to apply for loans in order to pay the exorbitant costs. However, undergraduates can only borrow so much from the federal government for these loans before hitting a limit. They might then apply for private loans, which usually require a co-signer for better rates.

These private lenders have become so popular that even companies like Amazon have offered them – partnered with Wells Fargo – to members of their Prime service. When there is a co-signer involved, interest rates average about 5.37 percent while students that apply for loans without a co-signer have interest rates that average at about 7.46 percent.

The problem for most parents or other family members or friends who co-sign these private student loans comes from the fact that although they are not the primary borrower, they can still be responsible for the repayment of the loan.  In some cases, repayment might be required even if the primary borrower is deceased.

Death, however, is not the only outcome that could prompt the co-signer to become responsible for the debt, nor is responsibility for the debt the only potentially painful outcome for the co-signer.

  • If the primary borrower simply cannot pay, then the co-signer might have to pay;
  • If the primary borrower pays late, then the co-signer’s credit can be affected;
  • The mere existence of the loan might inhibit the co-signer’s ability to procure other loans in the future because many lenders are loath to lend to a borrower who already has debts.

One of the biggest concerns for co-signers ought to be that removing one’s self from the loan is fairly onerous.  It must be done at the primary borrower’s request - this request is denied by the lenders at a whopping 90 percent rate according to The Consumer Financial Protection Bureau.  Often these loans are then sold to other banks, making it difficult to discern who, in fact, the debtor is in debt to.

Moreover, it is difficult for some co-signers to remove themselves from the loan because the primary borrower has a poor credit score or not enough income to warrant the release of the co-signer. It sometimes takes years of the primary borrower making on-time monthly payments before the co-signer can be released from the loan.

It may be difficult to look a loved one in the eye and refuse to co-sign a loan for them as they embark on an exciting chapter in their lives.  However, it is important to understand and weigh the risks involved before making that decision.


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