Beware of risks of co-signing a loan

The Baltimore Sun

College students usually don't have much of a financial track record, so to get a private loan for school they generally need a co-signer. And with lenders taking a harder look at borrowers during this credit crunch, the need for co-signers will only grow.

But as much as you want to help a student, think twice before putting yourself in this situation. Better yet, think 20 times. And then think again.

Being a co-signer is like taking out the loan yourself, with less control. If the primary borrower - the new graduate - is late with payments, your credit score gets dinged, too. Worse, if the borrower doesn't repay, you get collection calls and are on the hook to repay the loan.

"They could try to garnishee your wages," says Mark Kantrowitz, publisher of FinAid, an online provider of financial aid information.

Lenders require a co-signer when a student's ability to repay a loan is in doubt. With a co-signer, the student might also get a break on the interest rate on the private loan. Over time and under certain conditions, a lender may allow a co-signer to be released from the loan. But this will be impossible if the borrower is frequently late with payments.

Parents wanting to help a child, of course, might know the risks and be OK with them. But some co-signers - such as fellow students - might have no idea what they are getting into.

Lynne Handwerk, a parent in Whitehall, Pa., is trying to help her daughter out of such a mess.

Five years ago, when her daughter was 19 and a student at Pennsylvania State University, she started co-signing loans for her boyfriend at the time. Three loans, $20,000 total.

The mother says the ex-boyfriend has stopped repaying the loans. The 24-year-old daughter is now repaying her student loans while getting letters from the lender about her old boyfriend's debt, Handwerk says. He doesn't return the family's calls, she adds.

"I cannot believe that anyone would allow her to do that. She had $20,000 of her own undergrad loans and credit-card debt, a part-time job and nothing else," says Handwerk, who was unaware that her daughter had co-signed the loans until it was too late.

Lawyers have not found a solution. "Bankruptcy is not possible. You can't get rid of those loans," Handwerk says. It appears her daughter, who makes about $30,000 a year, will have to repay the loans with the help of her family, she says.

To be a co-signer, you generally must be a creditworthy legal adult, 18 or 21 in many states. Lenders might also have their own work, income or credit criteria, Kantrowitz says. "It's a minimal standard."

Citibank's Web site, for instance, says a co-signer must be a U.S. citizen or permanent resident, at least 18 with a satisfactory credit history and at least a year's worth of borrowing, charging and repaying. No bankruptcies, liens or delinquencies on any charge accounts are allowed.

If you are going to co-sign a loan, "ask the lender to send a duplicate bill to you," Kantrowitz says. That way you'll know if the bills are being paid.

And if they are not, you will have to step in if you want to avoid having your credit record damaged, says Kalman Chany, author of Paying for College Without Going Broke.

If a borrower is making good on the loan, you may be able to be released as a co-signer after some years. Conditions for release vary among lenders, so you need to ask your lender for details.

Generally, the primary borrower must make two to four years of on-time payments before a co-signer can be released.

Sallie Mae, for instance, requires 24 on-time payments. And if the borrower is late once, the clock starts all over again, says spokeswoman Martha Holler.

A lender might also require the primary borrower to have a good credit score - at least 700 on a scale of 850 - before releasing a co-signer, Kantrowitz says.

Another possible option for getting a co-signer released is a private consolidation, which is like refinancing the loan with a new lender, Kantrowitz says. The old loan will be paid off, and the new loan will have only the student's name on it, he says. But again, this will work only if the borrower has a good credit history.

Because of the seriousness of being a co-signer, be sure you and the student have exhausted other options. Chany says he recommends that families check overlooked state loans available through their home states or the states where the students are attending college. Some states offer loans with fixed rates that are lower than the federal program, he says.

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