Going to college in the fall and considering taking out a private student loan? Proceed with caution. If you need a cosigner and that person dies or goes bankrupt, you may have to pay off the loan immediately.
All student loans are a type of unsecured persona loans, which means that if you default, creditors don’t have the right to claim your property. But they can sue you, and your credit score will plummet.
Private Student Loans: the Harsh Reality
Between October 1st and March 31st, 2013, the Consumer Financial Protection Bureau (CFPB) received more than 2,300 private student loan complaints and over 1,300 debt collection complaints. Most involved the fact that borrowers were required to pay back loans in their entirety when a cosigner (often a parent or grandparent) died or filed bankruptcy.
Even worse, the complaints indicated that the loans were automatically placed in default when the cosigner’s status changed, though many were being paid on time.
Related article: Don’t Defer, Pay Student Loans Early
Almost All Private Student Loans Have a Cosigner
In 2011, 90 percent of private student loans were co-signed, which explains how this issue has become a problem for many borrowers. There are so many complaints regarding such loans that Congressman Rick Larsen (D-WA) introduced the Bereaved Borrowers’ Bill of Rights Act of 2014. He wrote the proposed bill as a protection for grieving students, who may also be facing financial hardship as the result of the loss of a loved one. The bill would prohibit lenders from initiating auto-defaults and reporting them to credit agencies as a result of a death or bankruptcy.
“The last thing students grieving the death of a loved one should have to deal with is default on a loan they are paying on time,” Larsen said in a press release. “Students who have invested in their education by taking out loans and pursuing degrees should be treated fairly every step of the way, including by private lenders. And students should not be hit with marred credit records that could haunt them for years because of circumstances they can’t control.”
Recommended: Check out SuperMoney’s top reviews of personal loan companies.
Removing a Cosigner is Difficult
Many private lenders advertise the option to remove cosigners after a certain number of on-time payments are made. So, of course, a logical solution to the cosigner conundrum is having the cosigner removed from your account as soon as possible. Unfortunately, according to findings by the CFPB, it’s not that easy. Many borrowers complain that the criteria for doing so is often unclear, and are facing obstacles while trying to remove cosigners.
What kind of obstacles? According to Bankrate’s article “Escape route for student loan cosigner?” it could take over a year of on-time principal and interest payments before a grad can consider cosigner removal. Even then, the student needs to have a perfect payment history across the board and be able to prove that they have enough income to finish repaying the loan. As we all know, new grads with secure jobs and sufficient income to pay back student loans after a year are few and far between.
Take a few minutes to read our article Don’t Get Buried In Student Loan Debt for more tips on how to avoid the student loan debt trap.
Should you take out a private student loan?
Considering the potentially negative economic consequences of getting a private student loan, it pays to proceed with caution. Check on the following before committing yourself.
- Does the loan automatically trigger a default if your cosigner dies or becomes bankrupt? This possibility will be listed in the student loan’s fine print. If so, this loan is too big of a gamble.
- Do you qualify for sufficient federal student loans to cover your educational expenses? The benefits of federal loans are many, including the fact that interest rates are fixed and generally lower than private loans. No cosigner is required, no credit check is necessary (except for PLUS loans), and you can defer loan payments if you go back to school.
- Can you manage the shortage another way? If a federal student loan isn’t sufficient to cover all of your expenses, you might be able to borrow directly from family. You could also earn extra money in the summer months before your first semester and cut expenses through a work-study program.
- How’s your credit history? If you have good credit, you’ll be more likely to get a better rate on your private student loan, which means paying less over the life of the loan. It may also mean that you can go without a cosigner.
- Is the interest rate fixed or variable? Variable interest rates are great when the rates are low, but when rates rise, your loan payments can quickly become unmanageable. A fixed rate gives you the opportunity to set a more predictable budget.
It’s also important to ask yourself what you need the loan for. Many advertisements target new students by pitching lifestyle needs with the loan. Need a new laptop for school? Have a hefty car payment? Need help paying the rent this semester? Many borrowers take on loans simply because it’s easy money that doesn’t have to be repaid until after graduation. Most of them don’t even need to be cleared by the school, and show up as checks in the mail.
If your motive for taking out a student loan isn’t strictly as a last resort to fund your college education, you could end up neck high in debt. When all goes well, private student loans can provide you with much-needed cash to pay for your education. Just make sure you read the fine print before signing.
Julie Bawden-Davis is a widely published journalist specializing in personal finance and small business. She has written 10 books and more than 2,500 articles for a wide variety of national and international publications, including Parade.com, where she has a weekly column. In addition to contributing to SuperMoney, her work has appeared in publications such as American Express OPEN Forum, The Hartford and Forbes.