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Co-Signing Private Student Loans: A Double-Edged Sword

Unless you have been living under a rock, someone you know has co-signed for another person’s private student loan. Heck, maybe you yourself are a co-signer – yes, YOU! In this day and age, the majority of lenders require co-signers for private student loans. It has become standard practice. And surely you, the savvy consumer, understand why: it gives the lender security. In other words, the more people who are personally liable to pay the lender back for the loan, the greater the chances are for the lender to recoup the money lent, plus, of course, interest, origination points, potential penalties, and the like. For this simple reason, co-signing has become second nature – something that no one seems to bat an eyelash at anymore…until now.

Students who need private student loans to finance their education have no say in the matter: co-signers or bust. They are prescribed two “choices:” (1) find a co-signer to provide a 0.23 second John Hancock; or (2) forgo their education altogether. What choice does an indigent student have who has no money, but dreams of a college degree? None. Choice is illusory. A co-signer is mandatory.

Aside from actually obtaining a private student loan to pursue a formal education, are there benefits to having a co-signer?

Sure. For instance, you may qualify for a lower interest rate or build and establish credit history. However, you must consider the cons. The amount of money originally borrowed will not be the amount ultimately repaid, particularly in light of the ever-popular forbearance and deferment periods, which usually bear interest at exponential rates. Should your co-signer or you fail to make payments on the private student loan, both your co-signer’s and your credit scores can plummet significantly. You can throw your vision board filled with pictures of your dream home courtesy of “The Secret” in the trash. And, in the meantime, you can beg for forgiveness from your co-signer for the embarrassment that he or she experienced while walking out of the car dealership empty handed after being rejected from financing that brand new car. If your co-signer or you continue to neglect your financial obligations to the private student loan, both your co-signer and you can be sued, in which case your lender can garnish both of your wages, place liens on your properties, and/or levy your bank accounts. For instance, your lender could take 25% of your wages per paycheck for years upon years, while entirely depleting your co-signer’s bank account without leaving a single penny to spare. I suppose, if worse comes to worse, you can give your granny co-signer an “IOU” note to replace her entire savings account that was wiped clean by Navient – a savings account that she relied entirely upon for retirement. Blood is thicker than water, right? Wrong. Don’t forget the harm that this co-signing business may cause in your relationship with your co-signer. I cannot even begin to tell you the amount of horror stories that I have heard from co-signers. Sigh.

What can you, you astute borrower you, do to curtail these co-signing pitfalls? First of all, make sure that you enlist a co-signer who you know and trust because this person will be in it for the long-haul with you. Second, educate your co-signer. Knowledge is power. Your co-signer needs to be aware of his or her obligations under the private student loan. Third, only borrow money that you absolutely need – nothing more and nothing less. Fourth, stay on top of your payments and do not fall behind. Your inability to pay affects both your co-signer and yourself. Finally, call us at McCarthy Law PLC (855)-976-5777 for a FREE consultation to see how we can help you with your private student loans. We negotiate directly with your creditors for significant reductions in your private student loan debt. We are happy to help anytime. So what are you waiting for? Call today!

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Kevin Fallon McCarthy is the McCarthy Law PLC’s managing attorney and an experienced Phoenix debt attorney. Mr. McCarthy has also worked as general counsel for a large corporation. He has corporate counsel experience in human resource matters, general corporate governance, and union class action litigation.