As college students nationwide make the trip back to campus for the Fall semester the credit scoring agencies remain as busy as ever working to report scoring information to the many private student loan issuers.
Are the Credit Scoring Agencies Reporting Student or Parent Data?
As the average cost of college has climbed rapidly over the last decade so has the sum of student loan debt floating on bank balance sheets, as shown by our student loan debt statistics. For parents, the task of saving for their son or daughter’s education has become ever more difficult. The price of tuition at many of the Nations largest Universities and Colleges has grown at a clip far above the rate of inflation. The steep increase in tuition has pushed a great number of parents into guaranteeing, or cosigning, private student loans for their students.
If you have recently applied for a student loan with your son or daughter you were almost certainly asked to “cosign” the loan. What does cosigning a loan mean exactly? Well, more and more parents are using their own credit to guarantee the student loans to their children. Financial institutions are hesitant to provide credit to the average 19 year old student. Cosigning was created to combat the inherent risk of lending to a college student.
In contrast to loans offered by third party banks, federal student loans do not require a cosigner. Uncle Sam has a little more confidence in the student’s ability to repay their debts than do the private student loan issuers. As of 2011, about 90% of private student loans were signed with the help of cosigner. The Consumer Financial Protection Bureau which keeps tabs on the industry reported a 67% increase in the percentage of loans filed with cosignors since 2008.
Federal Stafford Loans for undergraduate students will have a fixed rate of 4.66% if the student loan is taken out between July 1 and June 30, 2015. Federal Stafford Loans for graduate students will have a fixed rate of 6.21%.
What Are Some Cosigner Risks for Parents?
By acting as a cosigner, the cosigning party is effectively taking on the loan for themselves. At least in the view of the bank. For most students, applying for a student loan individually is off the table. However, there are options for student loans without a cosigner. The problem is that most students don’t have the credit history or income necessary to obtain credit from a bank.
Cosigners should review all the options on the table before making the leap and signing the loan. What happens if the student were to die with a student loan balance on their estate? How would this affect mortgage refinancing next year? I know these are tough questions, but they are necessary to consider.
With Parent Loans for Undergraduate Students (PLUS) offered by the federal government parents have the ability to borrow directly to help their student pay for tuition. PLUS loans cover the parents in the unfortunate circumstance that the student were to pass away.
This isn’t always the case with private loans. In some circumstances parents may be left on the hook for the the loan balance even if the student were to pass away. Tough, right?
PLUS loans differ from private student loans in a number of important ways. Unlike private student loans, parents won’t have to worry about their student affecting their credit history as a result of mispayment. Under the PLUS loan, the parent is obligated to repay that loan directly. As a result, the parent does not have to worry that his or her credit will go bad if the student is missing their monthly interest and principal payment.
To help mitigate some of this risk parents can take out life insurance policies to protect themselves. For relatively little ($15ish per month) parents can take out a life insurance policy for the balance of the student loans. This could be a great option for fearful parents.
All of this being said, there are a number of benefits for the student when taking on a cosigner. The student will first off have a far greater chance of approval. Second, the interest rate options available will be substantially lower. The substantially lower interest rate will save the student magnitudes in interest payments in the short and long term. As interest accumulates on deferred payment loans the build up will be magnified by every 1% increase in the fixed or variable rate.
Before taking the plunge and cosigning a loan for your student it is best to shop around. We suggest taking a look at the rates, protection for parents, and the repayment options available for the student. Every student and parent is in a different situation. It is wise for both parties to speak openly about all the available options.
Author: Dave Rathmanner
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