Cosigners Of Student Loans: Watch Your Credit!
July 23rd, 2006A Chicago Tribune article warns of the problems associated with cosigning for student loans and credit ratings.
If you cosign for your child’s student loan, you are held accountable for the repayment of the loan. I know it’s a nice thing to do for your son or daughter, but there is a huge risk when repayment time begins.
Since Stafford and Perkins Loans can only offer limited funding, parents often take out additional loans to finance their child’s college education. This makes the parents liable for repaying the loan every month.
If the student goes into default, both the student and parent will have their credit rating affected. Oftentimes, parents are uninvolved with the financial actions and obligations of their child once they graduate or leave college.
Having bad credit from this unfortunate situation affects all other credit-based financial activity such as the interest rate on other types of loans and getting insurance. The credit score can be damaged for up to seven long years.
The best solution for parents wanting to help their children, while protecting the parents’ credit is recommended:
…after students exhaust federal Stafford student loans, which carry a 6.5 percent interest rate, parents finance remaining costs by borrowing through the federal PLUS loan program, which are loans with a 7.9 percent interest rate.
…if parents use PLUS loans, they draw up an official contract with their child, outlining specific terms under which the child will repay parents after graduation.
