14 Oct Student Loan Cosignor Traps
My parents are refusing to cosign on a private student loan and are demanding that I live at home and commute to a nearby state University, a young family friend attending a private liberal arts college recently complained, implying that the parents were being unreasonable. Were they? A glance at websites such as gerridetweiler.blogspot.comsuggests otherwise.
When student borrowers default – often through no fault of their own – the lending company goes after the cosigner with all the ammunition our draconian laws put at his disposal.
According to Moody’s Investment Services, 50-80% of private student loans have a cosigner, typically a parent. Apparently the lenders do not have the same level of faith in the future earning power of college graduates that colleges do. Having a solvent cosigner with a decent credit rating maintains the value of the loan as an investment, but it opens up a whole new can of worms.
The parents are people in their forties and fifties who ought to be planning for retirement. They have already determined what they can contribute toward a child’s education out of savings and present income. Cosigning for spendthrift family members is a common factor contributing to bankruptcy among older Americans. Student loans don’t precisely come under the heading of spendthrift, but there are many instances where discretion and better planning could have substantially reduced their amount. Moreover, bankruptcy will not erase most student loans. The parent who cosigns for a private student loan assumes a high risk of financial headaches continuing into retirement years based on estimates of the value of a college education which the lender does not believe.
I doubt there is much forbearance built into these private loans. More likely it’s a case of a couple of missed payments, and bam! the lenders slap on a hefty default charge and go after the cosigner.
I think my young friend’s parents acted prudently. For one thing, they have four younger children whose educations would become hostage should the eldest default. For another, there was an affordable option. The whole business of parental cosigning puts parents in an unenviable bind. They want the best for their child. The educational institution convinces them that their program is a key to success, and the lender, that its product is necessary to pursuing that program. The parent is given figures on average default rates from government loans, and figures for lifetime earnings of college graduates which are full of biases, and told these prove that their risk is low when they cosign. The parent who demurs is made to look like a real Scrooge.
Back in the 1960’s I used to see Chicken Little Was Right bumper stickers. If there were a catchy slogan today which encapsulated the thought: Some loan terms are so bad that no end is good enough to justify them , I d put that one on my bumper perhaps next to the Chicken Little one, if it s still available.
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