My nephew has asked me to cosign a private student loan for
college. He's on his own since he lives independently from his mother,
his parents are divorced, and his father is completely out of the
picture. He's made it through 2 years of college with great
success. I'd like to help him. I have very good credit. What would be
the best way to do this? I understand that he got a $5,000 grant and a
$12,500 government loan. Since he wants to go to a private college, he
still needs about $12,000 for the year.
— Jacqueline P.
Think twice before cosigning a private student loan. A cosigner is a
coborrower, equally obligated to repay the debt. If your nephew is
late with a monthly payment, it will be reported as a delinquency on
both his and your credit records. If he defaults on the loan, it will ruin
your credit too, and the lender will seek repayment in full from
you. In fact, most lenders will start seeking repayment from the
cosigner the first time the borrower is late with a payment, even if
the payment is only a few days late.
On the other hand, if you have good credit it will increase your
nephew's chances of getting a private student loan and may result in a
lower interest rate too. This will save him a lot of interest over the
life of the loan. If you trust your nephew and he is reliable,
cosigning a loan can help him pay for school.
It looks like your nephew may be borrowing excessively. A $12,000
private student loan on top of a $12,500 Stafford loan is a lot of
debt for just one year of college. Perhaps there is a less expensive
public college he could attend instead? He's in a difficult financial
situation, with no parents to help him, so he may have no choice but
to borrow some private student loans. But he should keep the private
student loan debt to a minimum and carefully consider how he will be
able to afford to repay his student loans after he graduates.
My daughter has attended an expensive private college for two
years. I took out a loan for the first year, her dad for the second
(we are divorced). She will have to pay for the next two years herself
with loans. This was her choice — she could have gone to a
cheaper school and had it paid for in full by us. I am worried about
cosigning. I see that several lenders offer a cosigner release option
after the borrower makes several years worth of on-time payments in a
row. But I've read that many people are having problems getting
released. Can you shed any light on any of this? What about a
contract between my daughter and me that says that she would have to
eventually repay me if she defaults? I do want her to finish her
education, but I also need peace of mind.
— Val F.
Many lenders offer cosigner release options after the borrower has
made the first 24, 36 or 48 monthly payments on time. But the borrower
also has to have very good credit. When lenders tightened eligibility
standards on their private student loans during the credit crisis,
they also raised the minimum FICO score required for cosigner
release. They also review the borrower's credit history carefully, so
the borrower must have a steady job sufficient to repay the debt on
her own. The tougher standards have made it much more difficult to
qualify for a cosigner release.
Another option is for the borrower to obtain a private consolidation
loan on his or her own. Since this pays off the original private
student loans, it effectively releases the cosigner from his or her
obligation. Unfortunately, more than 4 out of every 5 private student
loans, including private consolidation loans, require a cosigner.
Have you considered obtaining a Parent PLUS loan instead of a private
student loan? It is a parent loan, so the student is not obligated to
repay it. But you could enter into a written agreement with your
daughter where she commits to making the payments on the loan. The
Parent PLUS loan does not depend on financial need, and payments can
be deferred while the student is in school and for six months after
graduation. The Parent PLUS loan has a fixed interest rate, so it is
likely to be much less expensive than a variable rate private student
loan in the long run.