Cosigning on a private student loan can be a big help to students trying to take out private student loans for college. How does a cosigner help? A cosigner’s credit history is factored into the approval decision, and a cosigner can strengthen a private loan application when a student lacks a long or solid enough financial track record.
Technically, anyone who’s an adult can cosign a private student loan application. Most students get their parents to co-sign, but friends and other family members can cosign. If you’re still hurting for some help, grandparents could be the next cosigner choice. Like any other adult, grandparents are perfectly capable of cosigning a private student loan application. While this can be helpful in a pinch, it bodes well to think about the actual responsibility of a cosigner.
Considering the Risks of a Cosigner
Although it may be difficult for a grandparent to refuse helping a family member, it is necessary to think about the consequences of cosigning a private loan. Co-signers are legally on the hook for debt repayment, just like the primary borrower. If the primary borrower slacks during repayment, then the cosigner will be responsible for the remaining debt.
If your cosigner is a grandparent, you need to think about the implications cosgining could have on their livelihood. Senior citizens are often on a fixed or limited income, and taking over student loan payments could negatively impact their finances uncontrollably.
Here’s an example. For a $100,000 private student loan on a ten-year repayment plan at six percent interest, a grandparent could be on the hook for a monthly payment of $1,100. While that’s an extreme loan example, interest rates can often push double digits, so it’s easy to see how a grandparent could struggle with an unexpected burden.
There are other consequences to consider aside from paying money. If the student loan enters default and collections, then your grandparents could take a major hit on their credit if they can’t pay up. On top of this, your grandparents could be subject to debt collectors who sometimes take a hard aggressive line.
With the consequences out of the way, it remains to be seen whether a grandparent cosigner would even help a credit application.
Would a Grandparent Actually Help Your Private Loan Application?
The first reason for adding a co-signer to a private student loan application is to improve the chances of approval for someone with bad credit. A borrower who has higher income and stronger credit history should theoretically improve those chances.
Second, the next reason for using a cosigner is to increase the chances of receiving favorable terms on an approved private student loan. If you have a good cosigner, then you should have a better chance at receiving a lower interest rate.
It’s easy to assume a grandparent would fit the bill for a strong cosigner, but you should take into account their financials such as income and credit history.
If he or she isn’t working anymore, then this could be a huge factor in a credit decision. A good co-signer candidate has the means to cover loan payments if the student borrower defaults. If your grandparents are retired without an income, then there’s the chance they won’t be able to cover payments, reducing the chance of a successful application.
Furthermore, there’s plenty of credit history to go over; you should discuss their past financial history. If they’ve been responsible the entire time, then they should be in good shape as cosigners. If not, this could be a negative factor on an application.
Protecting Yourself When You Cosign
Co-signing on a private student loan for a grandchild can make all the difference in paying for college, but be cautious in doing so.
Read the fine print regarding the definition of default. This could differ from lender to lender, and it’s an extremely important detail to understand if you’re a cosigner. Also, review what actions the lender can legally take against the borrower or co-signer in the event of a missed payment. You should also look into the terms regarding the event of death, disability, or bankruptcy. These all have an impact on how a lender will approach a cosigner.
It is also essential to check if there are prepayment penalties with private student loans, especially if you anticipate taking over loan payments at some point in the future. Taking a moment to understand your obligations as a co-signer is necessary if you want to help a grandchild, and yourself, in the pursuit to cover tuition.
Author: Jeff Gitlen
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