It seems like such a harmless approval: co-signing a student loan for my dear, dear Madison, the apple of your grandmother’s eye. Of course you want her to go to university; of course, you are willing to vouch for her! Too bad you don’t have much money left to help her, now that you are almost retiring. But it doesn’t take money out of your pocket to co-sign a loan, so why not give this beautiful child the benefit of your excellent credit?
Here’s why: you could get stuck repaying that loan
And you would not be alone: in a January 2017 report from the Consumer Financial Protection Bureau (CFPB) it is noted that the number of consumers 60 and older with the student Mr. Lo. Bumbling loans in the US has quadrupled in the last 10 years and reached an estimated $ 66.7 billion loans. In 2015 there were 2.8 million older Americans with loans; in 2005 that number was only 700,000. The average debt was $ 23,500, an increase over $ 12, 100, and researchers think this underestimates the problem because it does not include loans for home, credit, or other funding sources.
That is a surprisingly large non-mortgage debt for people who are about to retire, especially because in 2001 households at the head of these over-60s owed so little to student Mr. Bumpling loans that rounded their share to 0%.
Yes, some pensioners may have borrowed to go back to school themselves – to fulfill a lifelong desire for a doctorate in art history, perhaps. But most of the time they have borrowed or contributed to send displaced members of their families back to graduate school during the Great Recession or co-signed for the undergraduate generation. The CFPB analysis of data from 2014 shows that 73% of the student loans were used to finance the education of a child and / or grandchild.
One reason for so many co-signers, according to the CFPB, is that private student lenders, unlike federal lenders, routinely require a co-signer – the researchers estimate that 27% of these co-signers are 62 years and older (57% is 55+).
Sometimes these good deeds can come back to bite them. And to bite them: in 2015, 37% of federal student loans aged 65 or over were in default. In 2015, 40,000 borrowers aged 65 and over received their social security benefits to repay federal student loans. Since only the federal government can forfeit the benefits of social security for this purpose, this figure does not include anyone lagging behind private student loans.
The 15% loss of your social security check – the most the FBI can take over – is not fun. Collecting private credits can even be less pleasant, as the CFPB report states: harassment of telephone calls, poor maintenance and incorrect costs are just three of the reported problems.
Learn the legality of co-signing
First of all, consider that if someone needs a co-signer, this is because they are not only eligible for credit. You take a risk that the professional lender is not willing to take.
– By co-signing you accept the legal obligation to repay the loan in accordance with the conditions described in the credit agreement. If the primary borrower does not pay for whatever reason, you must do so.
– The amount can snowball. You may have to pay late fees or collection costs. A loan that has been deferred may have accrued additional interest on the principal.
– A loan to a student is based on future earning capacity – intellectual property, if you want, instead of on real estate such as a house. But when you co-sign, you risk your real assets.
Faced with the risks of student loans
Although the job market for the 2016 class was considered better than in recent years, it is still tighter than before the 2008 recession and wages are not high. According to a study by the Class of 2016 of the Economic Policy Institute, nearly 13% of young university graduates are ‘currently insufficiently full’, compared to 9.6% in 2007. No experience in an internship or the most requested university greats find themselves working minimum-wage jobs with fewer than full-time hours. They may not be able to keep track of loan payments. A 2005 class study found that five years later, only 40% of borrowers had made payments as set out in their credit agreements.
– Even if your beloved Madison can repay on time, her debt is added to your overall financial position on credit reports. With a lowered retirement income, this can give you an unfavorable debt / income ratio – a problem if you have to buy a car or large equipment, refinance an existing loan or mortgage, or raise money for another need.
– The margin of error is inconclusive. “Missing just one student loan pays a borrower in delinquent status,” reports the National Association of Consumer Bankruptcy Attorneys (NACBA). “After nine months in arrears, a borrower is in default.” Goodbye to that excellent credit rating.
Michigan Attorney General, Bill Schuette, says: “The creditor can collect this debt from you without first trying to collect the borrower. The creditor can use the same collection methods that can be used against the borrower, as you sue, your decorating wages, etc. “
Student loans are virtually inescapable; even bankruptcy does not destroy them. The NACBA warns: “Although any standard is detrimental to a borrower’s credit, the consequence of a default on a student loan is particularly difficult. As soon as there is a standard, the full amount of the loan is due immediately. The government also closes future federal financial assistance and removes the borrower’s eligibility for loan forgiveness. “
How you can try to protect yourself
There are a few precautions that you may need to incorporate if you think you should sign up for someone who is very close and dear. One of them is a written guarantee that the lender will make every effort to first repay the primary borrower. before he comes after you.
Another guarantee is to establish your right to take out after the loan has been properly paid by the primary borrower during the period specified in the loan agreement. A common term is 36 up-to-date payments; The Smart Option Plan from Sallie Mae requires only 12, which is unusually short.
Don’t count on getting a release, because one of the biggest complaints from borrowers is the difficulty of fighting through multiple barriers raised by lenders. As Chief Economist Amy Crew Cutts, chief economist Equifax, states, “Student loans are one of the loans that have not been affected by stricter acceptance standards since the start of the recession.”
Also note that state laws that apply to credit agreements may not support your efforts to write these provisions in private loans. (In the state where the contract is being performed, consult the Attorney General’s website for information.)
– Keep a constant eye on the loan so that you know if it is almost in default and you can take over to take over payments to stay up to date. Arrange your direct access to account information with the lender at the time of co-signing, so that it is included in the contract.
– Stay informed about the primary borrower’s place of residence. Good communication between you is the best early warning of problems. Do this for the duration of the loan.
– Private lenders and the federal government use third-party debt collection services. These can become very aggressive. In early May 2014, the Department of Justice reached a $ 96 million settlement with Navient, part of the major lender Sallie Mae, for charging illegally high interest rates and late fees for student loans to members of military services. (Navient admitted no offense.) The following week, the National Consumer Law Center filed a complaint against the US Department of Education for alleged violation of the Freedom of Information Act by withholding reports of its bonus plans to contractors who in fact exaggerated were hard-nosed – and often simply illegal – collection practices.
If you have already inked the line for someone, brace yourself: the situation with regard to loan repayments is even worse than it seems. Because students can stop the clock when paying back many loans by re-registering at school or by using deferment plans, some experts say that there is an even higher, so-called “hidden delinquency rate” that the settlement day is yet to come. It is a good idea to find out which consumer protection might be available to you in case.
The bottom line
By far the safest path is not to co-sign someone’s student loan, but if you think you should, or if you already have it, stay on it. Take care of yourself – if you were to die suddenly, the balance of the loan could come up in one go and flood the finances of the person you tried to help.