Co-Sign a Student Loan? ~ Barb Wollan—Field Specialist III—Families

A major focus of report was on problems related to co-signers. In 2011, 90% of private student loans had a co-signer (usually a parent or grandparent), compared to 67% in 2008. That’s a substantial increase in just three years, and it occurred for two main reasons: 1) more lenders required co-signers; and 2) many lenders offered lower interest rates when a co-signer was included.
Co-signing any loan is something to approach with caution, because if the primary borrower fails to pay, the co-signer becomes fully responsible for the debt. Parents or grandparents, however, may be willing to take that risk on a student loan because they want to support their child’s education. In addition, they may be spurred on by a “co-signer release” provision found in many student loans. These clauses typically indicate that after the borrower has made on-time payments for a certain number of months (perhaps 2-5 years), the co-signer will be released from the loan. That means the co-signer will no longer be legally liable for repayment of the loan. Aside: I know that if I was considering co-signing, that release clause would be a big factor in my mind.
Unfortunately, many consumers are having difficulty bringing the co-signer release to fruition. At the most basic level, the process or paperwork for releasing the co-signer is sometimes elusive – not visible on the lender’s website and sometimes not easily obtained even with repeated phone calls.
More seriously, in some cases the pre-requisites for co-signer release change over time or were not completely disclosed. Examples:
· One borrower requested release after reaching the required 28 months of on-time payments, only to find that they had increased it to 36 months. By the time he reached 36 months, the requirement had increased to 48 months!
· Other borrowers have found that in addition to so many months of on-time payment, the primary borrower also had to show a certain minimum credit score before the co-signer could be released. This requirement was in no way disclosed when the loan was originated.
The moral of the story? Always use caution. Private student loans have fewer built-in protections than federally subsidized student loans; therefore, it is especially important for borrowers (and co-signers) to make sure they understand all the details up front, and have them in writing.
If you’re like me, tending to be trusting that a company will be true to the informational leaflets provided, that means learning to be a little less trusting, to make sure you get a loan contract with details clearly spelled out.
 

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