Make sure you have complete information before agreeing, Using student loans to cover college education costs may be a smart financial move, but it should not be taken lightly.
The decisions you make now about the amount of money you will borrow based on future projections of your debt repayment ability can have long-term financial implications for you and other family members.
Having exhausted all other forms of financial aid and scholarships, however, taking out a loan can be your last resort.
First, you need to understand that there are two types of student loans – federal and private. Study abroad loans do not usually require a co-signer, but they do have some very strict collection practices if you should default on these loans upon graduation.
The federal government could mitigate future earnings or even withhold the federal tax refund that you would otherwise be entitled to. Private student loans, on the other hand, typically do not have enough breadth to collect, so they are more likely to seek co-signer loans.
This is someone who has a better credit rating than a student and who agrees to be responsible for repayment if the student does not repay the loan. It is often the parent, grandfather, relative or close friend who agrees to take this risk.
What to consider before co-signing
If you are asked to be a signer you want to think carefully before agreeing to do so.
You certainly want a student to be able to attend college, but there is no guarantee of what is happening down the road. While many promises are certainly made about responsibility, things can change very quickly after graduation.
A student may be over-indebted and have more credit than they can easily repay, the job market may not be as promising as it used to be, or the student may not be able to find a high-paying job quickly.
A student may be over-indebted and have more credit than they can easily repay
Whatever the reason, he or she declines payments and you suddenly start receiving collection notifications in your mailbox. Here are some things to consider before agreeing to sign the dotted line to pay for college:
- You could be responsible for the whole loan: Of course, we all focus on positives and best intentions, but so many things can happen. Even if your student is responsible and gets a good job, he or she might get sick, have marital problems, be in some kind of accident, or even die. None of this will relieve you of your obligation to repay a private student loan. Talk to the student and your spouse to make sure you can afford to make these payments if the worst happens.
- This could affect your credit rating: You may need to borrow money for your own use in the coming years, and being a co-signer can make it difficult for you to withdraw your home or car loan at reasonable rates. When student loans start arriving, any late or missed student loan payments may also reflect on your credit. Make sure the student has a solid understanding of the total amount of money that is being borrowed, how much to repay after the interest is calculated, what the total monthly payment will be, and when payments will begin.
- It would be difficult to get out of your obligation: Even if you think you have the flexibility to repay the loan if necessary, something unexpected can happen in your life. You may think that you are protected because the loan agreement has a release clause but read it carefully. It may not be possible to release until a student has made a certain number of payments. Credits are often sold on third-party collection sources that may not agree to the posting clause and may start coming after you for payment.
Advise your student to first rely on available federal, state, and institutional financial assistance before asking you to sign any private student loan.