The Daily Item, Sunbury, PA

Business

April 28, 2014

The Color of Money: Co-signing a loan? Think again

I asked my grandmother to co-sign on a car when I graduated from college. Instead of a signature, what I got back was a big-time lecture from Big Mama on the dangers of co-signing.

     Decades later, I can feel the heat of her fury that I would ask to put her finances in jeopardy. I was reminded of her scolding -- and her wisdom -- while reading the latest report on student loans from the Consumer Financial Protection Bureau.

     The report highlights complaints from borrowers that their private student loans, which don't have the same protections as federal loans, were being declared in default because their co-signers had died or filed for bankruptcy. The lenders demanded the full balance of a loan even though the borrower was paying on time, the CFPB said.    

     How crazy is that? Someone is paying the loan as agreed. The co-signer dies or files for bankruptcy. Now the borrower is in financial trouble if he or she can't come up with money to pay off the loan. This is why I don't recommend co-signing.

     About 90 percent of all private student loans were co-signed in 2011, most often by a parent or grandparent, according to the consumer watchdog agency. That's up from 67 percent in 2008. Students are often required to get a co-signer if they have little or no credit history. Additionally, getting a co-signer can result in a lower interest rate.

     But two major things happen when you co-sign. You also become the borrower, and you tie your credit history to the credit record of the person getting the loan.

     You are wholly and equally responsible for the debt. Not half or some, but all of it. You are not a backup borrower. When you co-sign, you are agreeing to pay that debt in full if the primary borrower defaults or misses even just one payment.    

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