Each year we are hearing about how tuitions are being increased and how many students are struggling to pay for their books, food, and rent etc. Many students work multiple jobs just to keep going, and some students might have to leave school all together because of their loans not covering everything they need for the current semester. It is very important that you know your rights and guard your finances and yourself. There is also a possibility that you can default on your loans because of a co-signer that you might have.
The Idea behind a Co-signer
Some people need to have a co-signer when applying for a student loan if they meet the following criteria:
- The person is too young
- Does not have an established job
- Does not have an established line of credit
Having a co-signer makes it easier for the lender to give out the loan so that the person applying can go back to school and so that the lender knows that there is another way to get the money back if the student does not pay the loan. Having a co-signer can also lead to lower interest rates on loans. Some applicants will get a parent or grandparent as their co-signer.
If the basis of the loans are dependent on the finances of the co-signer and something major happens to the co-signer such as a bankruptcy or passing away, then you will be immediately default on your loans. This can negatively impact your credit profile, which will make it a challenge to get future loans, make certain purchases, and even the possibility to gain employment. Even if the borrower is making regular payments on the loan, it was based on the finances of the co-signer and if something does happen then the loan will become null and void. In the event that the co-signer has filed for bankruptcy it can make it hard to make payments, receive any information or receive a bill statement.
What Happens When You Default On Your Loans
When you default on your loans it means that you have to pay the loan fully off right away, and when you cannot afford to pay in full it will go against your credit score making it drop. Some of these students do not always get notice when a default happens. Some other things that can happen when you default on your loans such as a collection fee can be added to your loan balance, 15% can be deducted from your paychecks, you can lose any state or federal tax refunds, etc.
The impact that a default on your loans has on your credit is much worse than being late with a payment. When you default on your loans not only will it make your credit score drop you could be denied a credit card, a car or home loan, the interest rate could rise on any existing loans or credit cards you may have. Also you could get denied approval for a checking account, and you may have to pay more for insurance on the home and car.
Alternatives for the Borrower
Here are some alternatives for you to make arrangements to keep you from default on your loans.
- The lender can determine if the borrower can have a co-signer release and keep the existing payment schedule.
- You can request to obtain another co-signer who has a good line of credit, another relative may qualify as your co-signer.
- The lender and the borrower can make arrangements to keep the existing payment schedule for a certain amount of time before the full amount is required, which gives the borrower an option to refinance or apply for a new loan with from a different lender with new conditions.
- You can try a loan rehabilitation program, although you will still face collection cost it will still be less expensive than paying in full. You could get charged about 18.5% of your total unpaid loan, which includes interest, in collection costs. To enter this program you must first contact a guarantor, then make at least 9 qualifying payments on time, and once this is done you will be sent an agreement to sign and return. Once the agreement has been returned your guarantor will transfer the loan to a new lender, the loan will then be out of default and you will make on-time payments to the new lender.
- Another option is consolidation, which has its benefits because it gives you more time to repay with less of a collection cost, but it has potential disadvantages as well. One of the disadvantages of consolidation is that it does not remove the default from your credit report, which is different from rehabilitation. With consolidation you need to arrange 3 consecutive payments with your current loan provider, and then agree to repay an income-based consolidation loan.