The good and bad of co-signing student loans

Student Loan application time is approaching fast and some financial opportunities do offer the option to have a co-signer.

Co-signer options are only available on private student loans and Direct PLUS Loans for graduate and professional students. Private student loans are offered from the private banking industry and are based on credit worthiness. The interest rates are set by the bank and can be either a variable or a fixed interest rate. There are no set annual or aggregate limits. You may borrow up to your full cost of attendance minus any other financial aid you receive.

Borrowers need to know

With private student loans, the benefit of having a cosigner is that it helps get a loan with a lower interest rate. Often the borrower does not have an established credit history, which leads to a low credit score. Use of a consigner with good credit would help secure a student loan with a lower interest rate. Here is an example of the savings: The difference in monthly payments on a $10,000 loan can be $50 or more when comparing an eight percent interest rate and a 12 percent interest rate. In addition, the difference in the accrued interest rate could be as much as $4,900 over the life of the loan.

It is a little different with Direct PLUS Loans. The borrower must be enrolled at least half time in a graduate or professional program. The cosigner will be required if the borrower has adverse credit history. There are no set annual or aggregate limits and a borrower may receive up to the full cost of attendance, minus any other financial aid you receive. Also with a co-signer, a borrower can exceed the $138,500 aggregate unsubsidized/subsidized limits.

Cosigners need to know

If you plan to be a cosigner make sure you can make the payments yourself. If the borrower does fail to repay, it will be your responsibility to make the payments. With that said, make sure the person you are cosigning for is trustworthy. If you do decide to cosign, make sure you get copies of all the papers and get an agreement, in writing and notarized, that the borrower will repay you all fees incurred including the monthly payments, should they fail to repay the loan. You do not want to wind up years down the road with the borrower telling the judge that you volunteered to repay the loan as a gift.

The majority of co-signers are relatives of the student. The private student loan lenders often advertise that the co-signer can be released once a borrower makes a certain number of on-time payments. Read the promissory note or contract to learn the terms of the loan you co-signed to better understand what you can and cannot do contractually. The Consumer Financial Protection Bureau does have a sample letter that they encourage borrowers and co-signers to send to the lenders requesting the option to release the co-signer.

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