It’s the time of year when many college students and their families start to think about how they’ll be paying for school in the fall. While some will be able to rely on savings, income from summer jobs, or federal student loans, a large percentage of students will have to take out private student loans in order to their education.
For those seeking private loans, they will likely need a co-signer since around 90% of private student loans issued require one. A co-signer is usually a parent, spouse, grand-parent, or close friend who signs as a co-borrower on a student loan. Co-signers are typically required because most students don’t have the income or the credit score required for them to qualify to borrow on their own.
The bank or private loan lender uses the co-signer’s financial information and credit score in order to approve the loan and set the interest rate. Oftentimes, students can qualify for a much lower rate by having someone co-sign.
The Risks of Co-Signing Private Student Loans
When you co-sign on a loan, you are agreeing to repay the loan if the borrower does not. The loan becomes part of your credit history. Many people who co-sign either don’t understand this or don’t realize how this will impact their financial lives.
For example, if the borrowers dies, then many co-signers believe the loan would be forgiven, but instead with some lenders the full balance of the loan may be immediately due. Not everyone has the capacity to pay such a large lump sum. Also, if the borrower misses a payment or is just unable to pay, then there’s also the risk that it could negatively impact the co-signers’ credit score in addition to collection efforts being directed at the co-signer.
In addition, co-signing a loan could impact your ability to borrow money for something like a mortgage or auto loan. That’s because when lenders calculate the amount that you’re able to borrow, they look at all of your outstanding debts and at something called your debt-to-income ratio. If your debt-to-income ratio, including the student loans that you co-signed for, is too high, they might not approve you for a mortgage or they might only be willing to lend you a smaller amount.
Many Co-Signers Regret Co-Signing
At LendEDU, we conducted a study of 500 parents who had co-signed their kids’ private student loans. We wanted to see if parents understood the risks of acting as a co-signer and how they felt about the long-term financial implications of their choice.
We found that 20% of co-signers did not understand the risks of co-signing a loan when they chose to do so. In fact, 20% of those that co-signed loans for their kids also felt like they were putting their retirement on hold. It’s not surprising then that we also found that 35% of co-signers regretted choosing to co-sign a private student loan and 34% would not co-sign their student loans for their kids if they could do it over again. Those numbers might be due to the fact that, 40% of co-signers claim that co-signing a loan for their kids compromised their ability to qualify for other loans such as auto loans, mortgages, or other types of financing.
Many of these co-signers feel like they have experienced negative consequences after co-signing private student loans. For example, 80% of the co-signers we surveyed say that their credit score is now lower because of their decision to co-sign.
Why is This Important?
The fact that most private student loans require a co-signer hurts parents. With over 20% of parents who co-signed loans believing that their kids’ student loans are putting their retirement in jeopardy, it’s obvious that co-signing has a huge impact on the financial lives of those that co-sign and the retirements of baby boomers.
But the results of our study are also a cautionary tale for parents who are considering co-signing student loans. It also shows that there is an important gap in the market since so many lenders are requiring co-signers, but many parents don’t want to co-sign student loans.
Luckily, there are options. There are loan programs designed to offer student loans without co-signers. While these programs are still relatively new, they represent a significant disruption in the college financing industry. Ascent Student Loans, is one of the leading programs offering student loans without a co-signer. Ascent Student Loans are made by Richland State Bank (RSB), Member FDIC, or Turnstile Capital Management, LLC, a wholly owned subsidiary of Goal Structured Solutions, Inc. (GS2). “We continue to provide innovative solutions in education finance that change the way people pay for college. Our Ascent Program for Funding Education, with its new Independent product, is our boldest innovation yet. While the rest of the market is making loans to parents, our objective is to put the money in the hands of the people who need it the most, students!” added Ken Ruggiero, Chairman and CEO of GS2. “We’ve developed our products with students in mind. We believe that higher education is a worthy investment and an opportunity for students to gain financial literacy and security.” The Ascent Student Loan Program for Funding Education was designed to take a snapshot of a student’s current and future situation considering factors such as credit worthiness, graduation date, program, major, school, and others. This may allow students previously barred from access to funding to get their education loans without a co-signer. Also, the Ascent Student Loan Program for Funding Education may give parents an alternative to unnecessarily taking on the financial burden of co-signing.