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Private Student Loan Co-signers Beware: Understand the Risks

Filed under: Loans and Borrowing — Jose Espada on March 8, 2017 @ 12:53 pm

In today’s marketplace, many private loans require a co-signer as a safeguard.  Often, the co-signer is a parent or relative.  Rarely is a co-signer a stranger, unless they fully understand the risks associated with private loan lending.  In a recent survey conducted by LendEDU, it was not surprising that one-third of the 500 parents surveyed who co-signed a private student loan, did not understand the risks associated with cosigning.

The survey can be found at https://lendedu.com/blog/student-loan-cosigner-survey-and-report/.

More than half of those surveyed said they believe their credit scores were negatively impacted by cosigning. About one-third said cosigning hurt their ability to qualify for a mortgage, auto loan, or other type of commercial financing.

“Too often, parents make the hasty decision to become a cosigner without fully understanding the risks,” the survey said. “Considering the long term financial liability that comes with cosigning on a student loan, a third of parents answering ‘no’ is quite concerning.”

As a cosigner, the parent can be affected by late payments made by the student borrower, something that’s not uncommon, according to the survey. More than one-third of parents said their children have made a late payment on a cosigned loan.

The survey also points out that refinancing private loans may be a more beneficial option for the parent cosigners, who would be released if their children refinanced their loans. Alternatively, parents can also ask the lender to release them. Still, 59 percent of the respondents said their children had not considered refinancing, and about 70 percent said their children had not asked for a cosigner release.

“Parents may think that by cosigning they are acting as a safety net in case their child cannot repay the loan,” the survey said. “In reality, however, the parent and child are equal partners in repaying the loan.”  This is something that parents or relatives need to fully understand before they enter into co-signing a private loam.

In general, it is still a far better option for graduate and professional students to borrow through the Federal Student Loan Programs.  It is getting more difficult to hear this message among the loud and often overbearing commercialism of private loans products.  What I find is that private loan companies advertise the positives of their loan products, but do not make available the negatives, restrictions, or loss of benefits of borrowing through private loans versus the Federal Student Loan Programs.

So, borrowers beware.

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