At the time, I didn’t give much thought to the consequences of consigning. I didn’t weigh the risks.

In my mind, it was an easy decision. Someone I cared about needed help, and all I had to do was sign my name so they could get help. Easy call.

I’m happy to report that things went perfectly. However, even in the best-case scenario, cosigning causes hardships.

When Cosigning Goes Right

My brother was a model borrower.

Shortly after consigning the loan, he bought me a thoughtful gift to say thank you for the help.

The loan he needed was relatively small and managable.

After finishing college, even during hard times, he always made sure his student loan bills got paid.

When the opportunity arose to remove me from the loan, he did it.

I never received a call from the lender about a late payment. We never had an awkward discussion about how his financial decisions impacted me. I never had to step in to make a payment.

It was a by-the-book, perfect cosigner experience.

Luck is Part of the Equation

My brother is responsible and a hard worker. When I cosigned his loans, he had nearly completed his degree.

From a risk-management perspective, consigning for him was relatively low-risk.

However, even in ideal circumstances, a little bit of luck is required.

There is a long list of things that could have gone wrong:

• Health – If my brother got sick during school or after school, it could have made getting a degree and repaying the debt very difficult.
• Job Market – There are plenty of smart and hard-working people unable to find a job after school. Sometimes people loose their jobs unexpectedly. Steady long-term employment isn’t guarenteed for anyone.
• Financial Emergencies – Student loan repayment becomes very difficult if you have a sick child, get a divorce, or are impacted by a natural disaster.

Had my brother faced a severe hardship, my cosigner responsibilities would have kicked in. I’d either have to make payments on his behalf or pester him to ensure the lender got paid despite his hardship.

It is certainly possible to take steps to make sure consigning goes well. However, luck will always be part of the equation. Thus, any cosigner should have a plan if the unexpected or unavoidable happens.

Why Cosigning is Always a Hassle

Even when things go perfectly, there is a downside to consigning.

When I wanted to buy a house, my brother’s student loans appeared on my credit report. In my case, it meant a smaller mortgage. For some cosigners, it may be hard to get a mortgage at all.

Some mortgage lenders are willing to exclude the cosigned debt from the Debt to Income ratio calculations on a mortgage application. However, getting this exception requires additional paperwork, and the borrower must prove they made payments on time, for a least a year, with no outside help.

In short, it was a hassle.

Tips for Borrowers with Cosigners

• Pick the right school and the right degree. If you ask someone to cosign a student loan, make sure it is a good investment. Don’t spend a ton of money on a degree that doesn’t justify the price. Overpaying for an education will make things diffiuclt for you and your cosigner.
• Make smart borrowing choices. Not all student loans are created equal. Find a loan with reasonable repayment terms and the lowest interest rate possible. This usually requires shopping around, but it will make life easier for you and your cosigner.
• Keep the lines of communication open. If you are struggling, let your cosigner know right away. They may even be able to help. If you miss a payment, your cosigner can either hear it directly from you or from a lender collection call. Cosigners don’t want unexpected calls from lenders.
• Say thanks. Your cosigner went out on a limb for you. They don’t benefit from cosigning in any way. A small gesture to show you understand and appreciate the risk they took is a good idea.
• Remove your cosigner from the loan when possible. Some lenders advertise cosigner release programs but qualifying is often a challenge. Fortunately, there are alternative strategies for cosigner release that are more effective. For example, you can refinance the student loans in your own name.

The post The Best-Case Scenario for Student Loan Cosigners appeared first on The Student Loan Sherpa.

Sadly, those days are over.

Student loans remain a helpful tool for funding a college education, but getting a student loan isn’t always worth it. In a world with deceptive for-profit colleges, shady lenders, and a challenging job market, students must make careful borrowing decisions.

Asking yourself these four questions should help identify whether or not a student loan is a good idea.

Am I going to graduate college?

A college degree doesn’t guarantee a job, but not having a degree makes it much harder to get a job.

If a reasonable-sized student loan — more on what is reasonable in a bit — is necessary to graduate, a student loan might be a necessary evil.

Additionally, any student loan borrower needs to carefully consider their path to graduation. Many of the worst student loan hardships happen to borrowers who don’t graduate college. Getting debt but no degree is a toxic combination.

Nobody goes to college expecting to drop out, but it happens every year. If the main appeal of college is getting out of town or partying, student debt is likely a big mistake.

Will I find a job after school?

Some degrees are highly marketable. If you have a computer science degree from a top college, your job prospects are likely excellent. Borrowing student loans to pay for this degree is probably a reasonable choice.

Other degrees don’t necessarily mean employment. You might enjoy film studies and aspire to become a movie director, but steady work is far from guaranteed.

The deeper you go into debt, the more critical it is to have a marketable degree.

Sherpa Tip: Take a close look at both your school and your area of study. Some schools have a terrible reputation for helping their graduates find jobs. Other schools have a good reputation, but some programs within that school do far worse than others.

The Department of Education’s College Scorecard is an excellent resource for evaluating colleges and fields of study.

Will I be able to afford my debt?

This is the question that many borrowers fail to ask.

Attending a good school and picking the right major is not enough. Ultimately, the value of the degree needs to exceed the cost of the debt.

What does this look like?

Suppose you are majoring in education with plans to become a teacher. Education is your passion, there is a need for good teachers, and you can’t pay for college without student loans. In this circumstance, some debt is undoubtedly justified.

However, it is critical that you can afford the debt you incur. In the United States, we do a lousy job paying teachers what they deserve. Thus, if you plan on being a teacher, you can’t attend an expensive private school and take out a ton of student loans. You won’t be able to make ends meet.

Sherpa Tip: Don’t plan on student loan forgiveness.

Many teachers may qualify for Public Service Loan Forgiveness. However, the PSLF program only applies to federal student loans. Due to strict undergraduate borrowing limits, many borrowers need private loans to pay for their degrees. Private loans don’t have a forgiveness option.

Even if you have loans that might one day qualify for forgiveness, it will take at least a decade to reach forgiveness. Worst of all, many borrowers who expect to qualify to find out they are not eligible.

Treat forgiveness as an insurance policy in case your Plan A and Plan B don’t work out.

Are my student loan terms and interest rate worth it?

Finally, if it is worth it to get a student loan, you must find the right student loan.

For the overwhelming majority of borrowers, the best student loan option is a federal student loan. Federal loans have the best repayment terms and options. They also have many important borrower protections and perks. I usually advise people to get federal student loans even if it means a higher interest rate than a private loan.

If federal loans are insufficient to pay for school, private loans might become necessary. This is where student debt becomes a high-stakes financial decision.

If you conclude that additional borrowing is a good idea, make sure to understand the terms and conditions of the loan. Take a couple of hours to shop around and find the lowest interest rate possible. Tools like Credible can help you check rates with many lenders simultaneously to find the best rate available.

Additional Resources:

• The Student Loan Sherpa Guide to Planning and Paying for College
• Parent’s Guide to Finding a Loan for Their Child
• Student Loan Basics – Terms and Uses for Student Loans
• How much student debt is too much? A Simple Formula

The post Are Student Loans Worth It? Four Questions to Ask appeared first on The Student Loan Sherpa.

Unfortunately, the drive to provide for the next generation can lead to major financial mistakes.

The Harm in Withdrawing Money from a 401(k) Account

Raiding a 401(k) is Expensive – Unless mom and dad are over 59 1/2, tapping into the retirement comes with an extra cost. Not only do they pay taxes on the money taken out of the 401(k) account, but they also pay a 10% early withdrawal fee.

The idea behind a 401(k) is to incur taxes when you have a much lower tax rate. If you are still working, your tax rate is much higher. Tack on the penalty for early withdrawal and the only winner with this option is Uncle Sam.

You can borrow for school, but you can’t borrow for retirement – Borrowing money for college sucks. This country is in the middle of a student loan crisis because too many people borrow money to fund educations that don’t justify the debt.

That said, the option to borrow money for college still exists. If you are short one semester, funds are available to pay for school. With retirement, no such borrowing option exists. This means work or go hungry.

Other Ways to Pay for School

Student loans are not the only way to pay for school.

Parents should be very nervous about student debt, but the answer is not dipping into their retirement. With resources like night classes, scholarships, grants, work-study, and in-state tuition, there are ways to pay for school without debt.

The notion of doing whatever it takes to attend a “dream school” can be a very expensive mistake.

Weighing Debt vs. Retirement Savings

Personal sacrifice for the good of the family is hardwired into the DNA of many parents.  In this case, putting a huge dent into retirement accounts may actually be worse for the family.

Student loans are better than a defunded retirement – Depending upon your retirement investments, most people expect that their retirement accounts will generate a 7% interest on average. Student loan interest rates are much lower if you shop around.

Additionally, getting a student loan avoids early withdrawal fees and the taxes from pulling money out of a tax-advantaged account. Finally, your child has far more time to pay off student debt than you have to save for retirement.

The decision goes beyond finances – These decisions can easily lead to tension between family members. A parent who decides to delay retirement to help a child will likely be quite upset if the child decides that college isn’t for them after a couple of years of school.

Even if the decision doesn’t cause immediate issues, a delayed retirement could mean that a parent cannot help with childcare for the grandkids. Each household will have its unique hardships due to limiting retirement options.

Teach a Man to Fish

The best thing a parent can do for a child entering college is to teach them basic personal finance skills. One would think that these lessons should be taught in school, but they are not.

Understanding credit cards, compounding interest, mortgages, and credit scores is essential for a healthy financial future. If these lessons are not taught at home, they often have to be learned the hard way.

Funding a college education presents the perfect opportunity to put these lessons into action. It requires considering college options, major choices, and borrowing options. Once school starts, it requires responsible spending. Having frank, difficult conversations about college choices leads to smarter decisions and a lifetime of financial security.

A 401(k) is not a College Fund

Sacrificing your financial future to provide for your child’s education is a brave and selfless act. However, it is also ill-advised and unnecessary.

No parent wants to be a financial burden on their kids because their 401(k) is underfunded.

The best way to help is to encourage responsible borrowing. Plus, parents can always help repay student loans at a later date.

The post Parents: Don’t Raid Your Retirement to Pay for College appeared first on The Student Loan Sherpa.

At its core, cosigning is a selfless decision. The cosigner receives no benefit, takes on tremendous risk, and helps a loved one afford college.

Sadly, the seemingly noble decision to cosign is often a mistake for both the cosigner and the borrower.

The Obvious Problem: Getting Stuck Making Payments

Some cosigners think they are just providing a recommendation or endorsement of the borrower as being a responsible person.

In reality, they are legally committing themselves to pay off the loan if the borrower is unable.

There is an endless list of reasons the cosigner could get stuck making payments.

Cosigners could face a major financial hardship if the borrower:

• can’t find a job,
• doesn’t earn enough to make payments,
• chooses to stop making payments,
• gets sick, or
• dies.

What Happens to Cosigned Loans if the Borrower Dies? In some cases, the lender will forgive the remaining debt when a primary borrower dies. Others will require the cosigner to take over the monthly payments. Some loans even have a clause requiring the balance paid in full upon the borrower’s death. Cosigners should investigate loan terms and get a life insurance policy when necessary.

Credit Score Consequences 

Cosigning is often a mistake because of the damage it can do to a credit report.

To become a cosigner, the lender will run a credit check. This hard credit pull can hurt the cosigner’s credit score. While the drop in score is usually small and doesn’t last long, it can cause an issue for cosigners trying to get a mortgage.

However, the big credit score risk comes in the form of late payments.

A single missed payment can last on your credit report for seven years. This delinquency will appear on both the borrowers and the cosigner’s credit report.

A missed payment can happen for any number of reasons. The borrower may think they are signed up for automatic payments, but there is a mistake in enrollment. The loan might get sold from one lender to another, and the borrower misses a payment because they didn’t know where to send it.

Usually, both the borrower and the cosigner receive notice and an opportunity to make things right before the negative reporting happens. However, this isn’t guaranteed.

Tension with Family or Friends

A cosigner depends upon the borrower making responsible financial decisions.

Lenders like having cosigners because it gives them an extra debt collector. If the borrower struggles, the cosigner will have a huge incentive to get the borrower to make payments.

Imagine being a cosigner and seeing the borrower buy a new car but then missing a student loan payment. Imagine being a borrower and having a cosigner ask personal financial questions to ensure you can keep up on payments.

The borrower/cosigner relationship can fall apart when money enters the equation. At the point the borrower stops making payments, things can get really ugly.

Debt-to-Income Issues for Cosigners

Cosigning a student loan is a mistake because of the many ways things can go wrong.

However, cosigning can also be a mistake when everything goes right.

Cosigned student loans show up on the cosigner’s credit report, even when the borrower is making payments. The problem with the loan showing up on a credit report is that it impacts the cosigner’s debt-to-income ratio.

There are ways to work around this particular issue in some circumstances. However, for anyone looking to buy a house, cosigning student loans can be a major problem.

Cosigner Release Programs: Many lenders like Navient offer a cosigner release, but actually qualifying for the release can be a major challenge. Those who have already cosigned student loans should investigate how to, directly and indirectly, get released from the student loan.

Cosigning a Student Loan is a Mistake When Federal Loans are Available

Cosigning a student loan is typically a mistake for reasons that apply to the cosigner.

When federal loans are available, getting a cosigner is a huge mistake for the borrower.

The analysis here is fairly simple. Cosigning a student loan only comes up with private student loans. Federal student loans are much better loans, and they don’t require a cosigner.

Before cosigning any student loan, make sure the federal options have been exhausted.

The One Time Cosigning a Student Loan Isn’t a Mistake

Sometimes cosigning a loan seems like the only option. Sometimes people don’t realize it is a mistake until it has already happened.

Borrowers who have existing student loans may look to refinance their loans to get lower monthly payments or a better interest rate. If these borrowers cannot refinance the loan without a cosigner, it might be smart for existing cosigners to help again.

If a cosigner is already the debt, and refinancing helps the borrower keep up with payments, cosigning on a refinance loan could be a smart decision.

The post Five Reasons Cosigning a Student Loan is a Mistake and One Exception appeared first on The Student Loan Sherpa.

If the primary borrower falls behind on the loan, cosigners must step in and cover those payments. Furthermore, even if the primary borrower is managing the loan well, cosigners may find it more difficult to qualify for lines of credit or loans.

Fortunately, many cosigners can remove themselves from the student loan through a cosigner release. Securing a cosigner release isn’t always easy, but between the traditional route and a popular shortcut, many borrowers can secure a Navient Cosigner Release.

The Navient Cosigner Release Requirements

The basic requirements for a release on a Navient student loan are fairly straightforward.

The primary borrower on the loan must do the following:

• Make Payments: The borrower must make 12 consecutive, on-time payments of both principal and interest while on a standard repayment plan.
• Provide Proof of Completion: They must submit proof of graduation or successful completion of course of study.
• Provide Proof of Income: They must submit proof of income.
• Verify Status and Age: The borrower needs to be a U.S. citizen or permanent resident and reach the age of majority (18 in most states).
• Apply for Release: They must submit an official application for a Cosigner Release.
• Pass a Credit Check: The borrower must demonstrate their ability to pay the loan independently by passing a credit review.

It’s worth noting that the cosigner does not need to take any actions during this process. It’s entirely up to the primary borrower to fulfill these requirements. Typically, the challenge for most borrowers is making a year’s worth of payments and successfully passing the credit check.

If these requirements pose a significant challenge, borrowers might consider refinancing the loan. This refinancing shortcut can bypass the need for a cosigner release by replacing the existing loan with a new loan under different terms, effectively removing the original cosigner from any obligation.

The Navient Application

The full Navient cosigner release application is available here.

As part of the application process, Navient requires borrowers to provide proof of income. According to Navient, the following forms of proof are acceptable:

• current year W-2 or 1099-MISC,
• copy of a paystub issued within the last 60 days,
• SSI/disability award letters issued within the current calendar year,
• current year statement of retirement income or annuities, or
• most recent Federal tax return.

Navient may request additional information at their discretion. Thus, it’s important to be prepared to supply further documentation if needed.

While the application process might be tedious, it is generally straightforward. However, the credit check remains the biggest obstacle for most borrowers, even those those with high incomes and good credit scores. It’s this step that often determines whether Navient will grant the cosigner release, as it assesses the borrower’s financial stability and ability to manage the loan independently.

The Cosigner Release Timeline

According to Navient, when applying for a cosigner release, it typically takes about 30 days to process the application. However, if Navient requires additional documentation to support the application, this timeframe can extend.

Upon approval, it can take up to an additional 30 days before the cosigner’s credit report reflects this change. This is because Navient reports updates to the credit bureaus at the end of each month. Consequently, if Navient grants the cosigner release just after they update the credit bureaus, the cosigner will probably have to wait the full 30 days for the credit report to reflect the release.

However, if necessary, Navient can provide a letter documenting the release of the cosigner. The cosigner can use this letter to prove that they are no longer legally responsible for the debt. This can be helpful for immediate financial transactions or negotiations that require evidence of reduced debt obligations.

Passing the Credit Check and the Problem with Traditional Cosigner Releases

All borrowers applying for a cosigner release must undergo a credit check. This credit check includes a hard-pull of the primary borrower’s credit report. (A hard-pull, or hard inquiry, means that the credit check will count as a credit inquiry and can potentially hurt the applicant’s credit score.)

Navient does not publicly disclose the specific minimum credit score or income required to pass this credit check. This lack of transparency can make it difficult for borrowers to gauge their chances of success.

The challenge with cosigner release requests is that lenders like Navient have almost no incentive to approve them. Cosigners provide the lender with an additional layer of security. This is because two parties are legally bound to repay the debt. Releasing a cosigner leaves only the primary borrower responsible, reducing the lender’s security without any benefit to them.

Unlike new credit applications, where approving creditworthy individuals generates business, the cosigner release process involves no new loan issuance but merely adjusts the terms of an existing one. Hence, lenders gain little by approving these releases.

Perhaps unsurprisingly, cosigner release rejections have led to significant criticism. Furthermore, they have been the source of complaints to the Consumer Financial Protection Bureau (CFPB). One CFPB report found that cosigner release policies in the industry were “often opaque” and “created substantial roadblocks for borrowers.” The same report found a 90% rejection rate, though specific data for individual lenders was not provided.

Given these obstacles, many borrowers turn to refinancing their student loans as an alternative method to achieve a cosigner release.

A Shortcut to a Cosigner Release

When a borrower refinances their student loans, the refinancing company pays off the existing loans and replaces them with a new loan, usually with different terms.

Student loan refinancing traditionally appealed to borrowers because the terms of the new loan can include lower interest rates and lower monthly payments. However, with the challenges borrowers face in obtaining cosigner releases, borrowers have begun using refinancing as an alternate strategy for removing cosigners from the loans. Refinancing eliminates the need for a cosigner release by simply paying off the original loan, thereby releasing the cosigner from any further obligation associated with that debt.

Readers of this site have reported the most success using SoFi or Splash Financial to get approved without a cosigner. However, there are about 20 different national lenders that provide refinance services.

The Problem with Refinancing and Making a Decision

A new loan with new repayment terms is typically the advantage of refinancing. However, these new terms can potentially be a disadvantage.

Borrowers who have Navient loans with low interest rates may find that the refinance shortcut is not the best route.

If you’re uncertain about whether to refinance or pursue a cosigner release through Navient, it could be wise to explore both options simultaneously. Start by applying for the cosigner release with Navient to see if you can maintain your favorable rate without your cosigner. Meanwhile, initiate the refinancing process to compare the terms you might receive from different lenders.

At present, the best interest rate currently offered by refinance lenders is about 2%. Those who have interest rates with Navient below 2% may find that jumping through hoops to get the cosigner release is the best approach.

The post How to Qualify for a Navient Cosigner Release (Plus a Shortcut) appeared first on The Student Loan Sherpa.

One such parent recently emailed us the following question:

I’m interested in making annual lump sum payments on my daughter’s student loans, using one of my retirement accounts from which I can withdraw without penalty.  Have you heard of this being done, and can you advise me on the effects it might have on a repayment plan? The end goal is to pay the student loans ($60K) off in about five years so that I don’t incur an excessive income jump in any one year.

While helping children out with their student loan payments may sound like a simple and straightforward process, several factors require consideration.

Don’t Ruin Retirement

We’ve already discussed the dangers faced by parents who sacrifice their retirement to help their children pay for school. The same concerns apply to parents who wish to help out their kids pay off their student loans. Offering assistance is admirable, but be careful not to stretch too thin. The last thing any parent or child wants is to have student loan assistance be the cause of a retirement plan failing. Before making any student loan contributions, it is essential first to make sure the payments are affordable.

Think About the Payment Consequences

Many individuals repaying their student loans have multiple loans and/or multiple lenders. When facing this situation, targeting the best loan to pay down is a critical consideration.

Parents choosing to help by making a large student loan payment should carefully consider how the payment is applied.

For those making a lump sum payment, one strategy would be to pay off a loan entirely. By eliminating a single loan, you free your child of a monthly student loan bill. If the payment only covers part of the debt, the monthly student loan bill will remain the same.

Another option is to pay down the student loan with the highest interest rate. This approach won’t free up cash each month for your child, but it will help them eliminate their debt the fastest.

Finally, most borrowers should pay off private loans before paying off federal student loans. Federal student loans come with borrower protections like income-driven repayment plans and student loan forgiveness. Because of these federal programs, paying off the more dangerous and less forgiving private loans is usually the best plan.

Lump-Sum vs. Monthly Payments

Making lump-sum payments is typically more productive than sending out monthly payments. This is because of the daily accrual of interest on the debt. The larger the payment, the less interest can accrue. From an accounting perspective, making a lump sum payment will get your child to student debt elimination the fastest.

The advantage of monthly payments is that you can take over the monthly burden from your child. It becomes one less bill for them to worry about for as long as you cover the payments.

Don’t Forget Taxes

The approach suggested by the reader email — spreading out the lump sum payments over several years — is a brilliant move. This allows the 401(k) withdrawals to be taxed substantially less. Because 401(k) withdrawals count as income, it is vital to ensure that your yearly income does not become too high and subjected to a larger tax rate.

With the passage of the 2018 tax bill, there are two large jumps that many parents might face. The first is from the 12% bracket to the 22% bracket, and the second is from the 24% bracket to the 32% bracket. If you are near one of these big jumps in the tax rate, it will be important to discuss your plan with your tax preparer so that you can stay within the desired bracket.

Finally, for children with substantial balances, gift taxes may come into play. The good news is that families can usually avoid the gift tax, as discussed in a previous article on gift taxes.

Taxes vs. Interest

One way to look at student loan assistance planning is to weigh the tax vs. interest consequences. If you make a large withdrawal from your 401(k) and pay off the student loans completely, you will save your child the maximum amount in interest possible. However, you will also maximize your tax costs.

If you spread out the contributions over many years, the tax burden shrinks. However, that means more spent on student loan interest over the life of the loan(s).

The key is to find a balance between these two competing issues. Interest rates and individual marginal tax rates will mean the optimal approach varies from one family to the next.

An Additional Trick

Parents looking to assist their children might also consider facilitating a student loan refinance by consigning a refinanced student loan. We usually don’t recommend cosigning, but if you plan on paying off the loans and won’t be making a housing purchase or other large purchase over the life of the loan, it might make sense. This could allow for lower interest rates and spreading out the lump sums over the years.

This route is effective because lenders consider cosigned loans to be less risky. By having less risk, lenders can charge a lower interest rate. Our student loan refinancing page has a list of lenders providing this service, a more detailed explanation of how it works, and some tips for getting the most out of the process.

Student Loan Payment Help from Parents Can Take Many Forms

Every family will be looking at different student loan situations and tax considerations. What works best for one family may not be the best option for another. The key is to think about different strategies to see how the numbers play out.

The post Guide for Parent’s Helping Their Children with Student Loan Payments appeared first on The Student Loan Sherpa.

Please help! I cosigned a student loan for my child/grandchild/friend, and they are not making payments. The lender keeps calling me. What can I do?

Sometimes the primary borrower might be struggling financially and genuinely unable to afford the payments. Other times, they might have the means to pay but choose not to. Regardless of the situation, the lender will hold the cosigner responsible for the payments.

Unfortunately for cosigners caught in this predicament, there are no simple solutions. However, there are some strategies that may help resolve the issue.

Today, we’ll explore these strategies to assist cosigners in managing or resolving their obligations.

Cosigner Release Programs

Securing a release from the loan is the most straightforward and definitive solution for a cosigner. By granting a cosigner release, the lender is agreeing to completely remove the cosigner’s responsibility for the debt.

Unsurprisingly, lenders don’t like granting a cosigner release. Lenders often require that the primary borrower demonstrate a history of consistent, on-time payments over several years before they will even consider a release application. When the borrower applies to have their cosigner released, they must independently pass a credit check. Lenders tend to be very strict on this credit check and look for any possible excuse to deny the cosigner release.

Thankfully, there is a practical alternative that can benefit many cosigners. If the primary borrower refinances their student loans with a new lender, the original cosigned loan is paid off as part of the refinance process. While this isn’t technically a cosigner release, it effectively removes the cosigner from the loan. This method often proves to be the easiest way to free a cosigner from their obligations associated with the original student loan.

Help the Borrower Get Their Finances in Order

For some people, managing money comes easy. For others, it presents major challenges.

It is fairly common for borrowers in the early stages of repayment to miss a payment deadline. Sometimes this is due to difficulties setting up automated payments — a common issue with some student loan providers. Other times, a simple error connecting bank accounts can be the source of a missed payment.

Additionally, many borrowers miss payments because they were unaware a payment was due. Student loans typically come with a six-month “grace period” after graduation before the first payment is due. A borrower whose contact information changed after college could easily miss a loan statement.

From the cosigner’s perspective, many of these mistakes can be frustrating. Fortunately, most are quickly resolvable before any serious issues develop for either the borrower or the cosigner.

The situation becomes more complex when borrowers are financially struggling and genuinely cannot afford their payments. In such cases, guidance from a cosigner can be invaluable. Cosigners can provide practical advice on keeping track of bills and managing budgets. Oftentimes, wisdom and experience shared by a parent or grandparent may be all a young borrower needs to head in the right direction.

In more extreme situations, cosigners might even consider lending money to help ensure the borrower doesn’t miss a payment.

Maintaining open communication and collaboration with the borrower is crucial. The enemy in this situation should be the student loans. If the borrower and cosigner are at odds, the situation can become detrimental for all parties involved.

Should I Hire an Attorney or Consider a Lawsuit?

Unfortunately, relationships between borrowers and cosigners can become strained, particularly when financial difficulties arise. The legal system may provide some remedies to cosigners, but the odds are often slim.

Legally, both the borrower and the cosigner are bound by contract to repay the debt owed to the lender. It’s important to understand that, regardless of any personal agreements or discussions between the borrower and cosigner, the lender is legally entitled to seek repayment from the cosigner if the borrower fails to make payments.

In situations where the borrower is not fulfilling their payment obligations, a cosigner could take legal action by suing the borrower. However, this approach can often lead to unsatisfactory outcomes. A court could mandate that the borrower must repay the cosigner or order the borrower to continue making loan payments. However, if the borrower lacks the financial resources, the cosigner may still find themselves responsible for the debt. Winning a legal battle against the borrower does not alter the agreement the cosigner has with the student loan company. Furthermore, it doesn’t guarantee that the borrower will reimburse the cosigner.

Laws regarding contracts can vary significantly between states, so cosigners facing severe issues might benefit from consulting with a local attorney to explore their legal options. Unfortunately, the legal system may not always provide a practical or favorable solution for cosigners, and navigating these waters can be challenging and often frustrating.

Investigating Debt Settlements

When borrowers fall behind on a debt, settlement can be an attractive option. Settlement allows the borrower to clear the debt for less than what they owe. This provides the borrower with some relief while allowing the lender to avoid a total loss by receiving some payment.

However, settling student loan debt is notably more challenging than settling other types of debt, such as personal loans or credit cards. With general consumer debt, lenders fear that the borrower may declare bankruptcy, which could completely clear the debt. In contrast, erasing student loan debt through bankruptcy is exceptionally difficult. This makes lenders less fearful of losing the entire amount owed. Thus, they are generally less willing to negotiate and accept a reduced payment.

The presence of a cosigner complicates the situation further. Since a cosigner provides an additional guarantee on the debt, lenders know they have another potential source of repayment. Knowing they can pursue the cosigner for full repayment if the primary borrower cannot pay reduces their incentive to accept a settlement.

Settlement opportunities might be slightly more feasible in situations where the debt has been delinquent for an extended period or if there are extenuating circumstances that affect the borrower’s or cosigner’s ability to pay. However, in most cases, achieving a settlement on student loan debt remains a tough endeavor. Those considering this route may need to consult with a financial advisor or attorney to explore their options and understand the potential impacts on their financial situation and credit.

Options for Loan Modifications

Lenders sometimes adjust loan terms in order to help the borrower stay current on their payments. The greater the hardship faced by the borrower, the more likely a lender will be to offer a lower interest rate or monthly payment.

When a loan has a cosigner, the lender typically examines the financial situations of both the primary borrower and the cosigner before agreeing to modify the loan terms. If the cosigner is not experiencing financial difficulties, the lender may be less inclined to alter the loan terms, assuming that the cosigner can continue making payments.

If loan modification isn’t feasible with the current lender due to the cosigner’s stable financial situation, refinancing the loan with a new lender might be an option. For borrowers experiencing hardship, securing refinancing on their own can be challenging. However, having a cosigner with a good credit history and stable income can increase the likelihood of approval for refinancing. This can lead to potentially better loan terms, such as lower interest rates and monthly payments that are more manageable for the borrower.

In this circumstance, a new cosigner can replace the existing one, or the current cosigner can agree to cosign the refinanced loan. This can be advantageous as the new loan may have terms that allow the borrower to more easily manage the payments. Once the borrower’s financial situation improves, there may be an opportunity to refinance the loan again, this time ideally without a cosigner. This step would release the cosigner from any obligations, assuming the borrower can qualify for refinancing based on their own financial merit.

Both borrowers and cosigners should familiarize themselves with the refinancing process and compare different lender options. While the ideal scenario involves the borrower refinancing independently, having a cosigner step in to help secure better loan terms can be a practical interim solution. Opting for a longer-term loan, such as a 20-year term, can significantly reduce monthly payments, which may prevent the need for the cosigner to provide direct financial support.

This approach not only helps the borrower manage their debt more effectively but also protects the cosigner’s interests by potentially reducing their involvement over time.

Final Thought: Don’t Lose Sight of the Big Picture

Cosigned loans often involve close relationships, such as between parents and children, where financial strains can heavily impact personal connections.

Despite the challenges that can arise with managing student loans, most situations have viable solutions. The key to navigating these issues successfully is open communication. Both parties— the borrower and the cosigner—need to collaborate closely to explore all available options. By working together and maintaining transparency about financial realities and capabilities, it’s possible to find strategies that mitigate the burden of the loan.

Effective cooperation might involve restructuring the loan, seeking refinancing options, or exploring deferment or forbearance if temporary financial hardships occur. Additionally, it’s crucial for both parties to stay informed about the terms of the loan and any changes in the financial landscape that could affect their obligations.

By jointly tackling the challenges, maintaining open lines of communication, and regularly reviewing financial strategies, borrowers and cosigners can manage the loan more effectively and preserve their relationship.

The post I Cosigned a Student Loan and the Borrower Isn’t Making Payments appeared first on The Student Loan Sherpa.

This traditional approach has served many families well. After all, why would somebody borrow money to pay for college if they already have some money set aside to pay for school?

Unfortunately, the escalating cost of college has caused major problems for this classic approach in many families. As more and more students need student loans, parents face some really hard questions: How much should we contribute each year? How much student debt is too much? How are we going to help our children fairly and equally pay for school? What about our retirement?

These questions may be easy for the wealthy, but most families have to be very careful how they use limited funds to cover a massive expense.

Ironically, the growing student loan crisis has created a situation where many families would be better off borrowing money to pay for school rather than dipping into their savings. Instead of helping pay for college during college, it may be best to help pay for college during student loan repayment.

The benefits of waiting to help until student loan repayment are especially obvious for families with several children.

A New Way to Divide Family College Resources Among Children

For years, families with multiple children have struggled to fairly divvy up college funds. If the firstborn gets too much help, there may be nothing left by the time the third child goes to school. Unknowns like scholarships or alternative plans for younger children make these projections nearly impossible.

Rather than spending any money during college, parents might elect to help during student loan repayment. This would allow for a more efficient allocation of resources as parents would have the opportunity to help the child or children that need the help the most.

In a family of three children, one child might get scholarships and then find a very lucrative job right out of school. Another child might get a job in public service, putting them on the path towards loan forgiveness. The third child may find a more challenging job market and feel a much bigger burden from the student debt.

Some parents might believe that each child should get an equal amount of help. Others might want their help to go where it will do the most good. In our example, the first child likely will need very little help. The second child might need some assistance, but the third child would be the one facing a major hardship.

Each family might approach this question differently, but by delaying parental assistance until after school, mom and dad have more options available and they have more information available at the time they help.

Parents with one child might still benefit from delayed assistance in paying for college.

Help with Repayment will be Greatly Appreciated

Let’s look at the two ways a parent can help pay for school from the child’s perspective:

Going the traditional route, mom and dad write a big check at the beginning of the semester and the child is able to take out a smaller student loan. This help may be appreciated, but many college students may not yet understand the difficulty in saving that money or the significance of the contribution.

Compare that to a student who has just finished college and is trying to make sure their first paycheck will cover all of their bills. For many, this is a scary time and the time when the value of a dollar becomes real. If mom and dad step in to help at this point in time, the help will be more meaningful and more tangible to the child.

The appeal to helping in repayment is more than just an emotional benefit.

Student Loan Repayment Help Can Create More Teachable Moments

Mark Twain once quipped that, “When I was a boy of 14, my father was so ignorant I could hardly stand to have the old man around. But when I got to be 21, I was astonished at how much the old man had learned in seven years.”

Many teenagers make the mistake of thinking they know everything. A twenty-something recent grad worried about their finances will be far more open to the wisdom and experience that mom or dad might have to offer.

By helping during repayment, a parent can aid their child in crafting a budget. That same parent can explain how compound interest works and help their child balance retirement planning needs against their student debt. In repayment, a child will also be far more interested in getting help tracking down the lowest possible interest rates for their loans.

Parents don’t have to be financial experts, but they can share their experiences and help their kids avoid mistakes that mom and dad may have made. Unfortunately many high schools and colleges fail to teach these financial lessons. Parents can teach lessons that might end up being more valuable than the money they contribute.

Waiting to assist can also help ensure that all four years of college get funded.

Money in the Bank is a Great Backup Plan

Right now, most families have little trouble finding student loans for school. Future developments in the economy or in politics could change the equation.

If the United States enters a recession, lenders may not have sufficient funds to lend money to qualified borrowers.

The government may choose to stop lending money to students, which could make borrowing more difficult and more expensive. New government regulations on lenders might cause them to raise interest rates or stop lending.

We can come up with what-ifs for days. The important detail is that the future, even just four years from now, is unknown.

If borrowing suddenly becomes far more difficult for the final year of school, families will be glad they set aside some money just in case.

Delaying Help Makes for Better Retirement Planning

Parents of college students may be a decade or two away from retirement.

Figuring out how much they can afford to spend on college is a very difficult question.

This site has argued in the past that you can borrow money for college, but you cannot borrow money for retirement. Pushing college assistance back five years may not remove all of the variables, but it might answer many questions.

Some parents feel guilty worrying about retirement instead of their child’s education, but it is necessary. A failed retirement could mean that the parent becomes dependent upon the child for financial support. Avoiding this situation is in the best interest of everyone in the family.

Paying up Front can Still Make Sense

Though there are a number of arguments in favor of student loans before parental assistance, there are still important reasons that mom and dad might want to help from the beginning.

For starters, 529 plans and tax breaks might make tuition contributions go a lot further than student loan repayment help.

Going beyond the math is the concern that student loans can be a very dangerous financial choice and have many pitfalls.

The idea behind this article is to propose an alternative route that may not otherwise be considered. It isn’t to suggest that borrowing student loans can’t be a mistake. Any student loan can be a risk and the more student debt that is borrowed, the more difficult the situation becomes.

The most important thing for any family is that they carefully consider all options available and make the choice that is best for their individual circumstances.

The post Parents: Helping with Student Loan Repayment May Be Better than Paying Tuition appeared first on The Student Loan Sherpa.

Whether or not parents have a duty to help their children pay for school isn’t really a legal question… they don’t.

As for the moral and ethical considerations, everybody looks at these issues differently, so it would be a challenge to find any sort of consensus.

Instead, I’d like to look at things from a practical perspective. Before we can make a decision about parent responsibility, we must first answer a couple of other important questions: When can a parent afford to help their child pay for school? What forms of help can a parent provide? What about families that are struggling to get by?

Many Parents Can’t Afford to Help Pay for College

Before we can even discuss whether or not a parent should help their child pay for school, we must first decide whether or not a parent can pay for school.

Parents who are drowning in debt of their own, and barely able to get by obviously are not in a position to help pay for a college education.

Things get complicated for the families who are on a more solid financial footing. The ability to help with school quickly becomes a retirement question for most parents. Before you can help a child pay for college, you first need to take steps to ensure you have a secure retirement.

Retirement for the Parents vs. College for the Kids

One of the biggest mistakes a parent can make is digging into their retirement account early in order to help pay for school. However, the retirement risks go far beyond expensive early withdrawals. Any financial decision that can impact retirement, such as skipping retirement contributions for four years, needs to be carefully considered.

On the surface, worrying about retirement ahead of your child’s college education might feel a bit selfish. After all, aren’t parents supposed to make sacrifices for their children?

The reality is that retirement needs to be a bigger financial priority for mom and dad. Kids can borrow money to pay for college, but parents can’t borrow the money they will need in retirement. Parents who fail to secure a viable retirement can quickly become a financial and emotional burden on their children. This burden is arguably worse than student debt.

Delaying retirement or being a bit more frugal in retirement are reasonable options for parents who want to help their children pay for school. The unreasonable choice is the decision to help a child pay for school with no understanding of the retirement implications. Sitting down with a fee-based financial planner might be a bit pricey, but such a step could be money well spent for families unsure of their financial outlook.

Plus, helping with school doesn’t necessarily mean writing a big check…

What does it mean to help pay for school?

Footing the bill is the obvious way to help pay for school, but there are a number of other steps that a parent might take in order to help their child pay for college.

Borrowing Money to Pay for School – Many parents elect to borrow money in the form of a federal Parent PLUS loan to help their child pay for college. These loans offer more flexibility than private student loans, but the federal perks are limited compared to what students get on their federal loans. The advantage of the Parent PLUS loan is that they have much higher borrowing limits than undergraduate student loans.

Cosigning Loans – Many college students are unable to qualify for a private student loan due to a lack of credit history and income. As a result, many parents cosign their kid’s loans. The immediate impact on the parent cosigner is that the loan will appear on their credit report and potentially hurt their debt-to-income ratio on mortgage and other credit applications. The big risk is that if the child is unable to pay the loan, the parent is legally responsible to pay back the debt. Based upon graduation statistics, parents should be prepared for the possibility that they might have to repay the loan.

Help in Repayment – One of the most underrated ways a parent can help their child pay for school is to assist with student loan repayment after college. This help may be more appreciated and make a bigger difference than writing a check at the beginning. Additionally, with the passage of time, a parent may be in a much better position to comfortably assist without endangering their retirement.

However, the most important thing a parent can do for their child as they prepare for college goes far beyond writing a check.

Financial Lessons are More Valuable than Financial Assistance

Give a man a fish and you feed him for a day; teach a man to fish and you feed him for a lifetime.

The old proverb about giving a man a fish has special relevance when it comes to financial habits. The sad reality for many American high school students is that they are not taught basic personal finance in high school. Compounding the issue is the fact that discussing money is often considered to be inappropriate or rude.

As a result, far too many people are ignorant about topics like compounding interest, credit scores, and debt-to-income ratios.

Teaching your child lessons on personal finance doesn’t require an economics degree. In fact, it doesn’t even require a parent who is good with their finances.

Suppose a parent is facing huge credit card debt and is unable to assist their child with paying for college. Though it might be difficult, that parent could sit their child down and explain the mistakes that brought them to their present situation. That parent could explain how a large portion of their income goes to credit card companies as interest… not reducing their debt, but supplying corporate profits. A discussion on the dangers of borrowing money and an explanation of terms like principal balance, interest, and interest rates could be life-changing for the child.

Parents who have solid personal finance habits should focus on passing those financial habits on to their kids. Applying these lessons when making decisions about paying for school is a great way to put them into practice.

It is hard to place a value on teaching lessons about responsibly managing money, but there is no doubt that it is incredibly useful.

A college student with these lessons instilled can avoid many of the expensive pitfalls that trap other students and result in decades of hardship and regret.

Ultimately, these habits are more important than any financial assistance that a parent might provide for college. This is the help that all parents can provide… no matter what their bank account looks like.

The post Do Parents Have a Responsibility to Help Their Child Pay for College? appeared first on The Student Loan Sherpa.

My son has taken out subsidized and unsubsidized federal loans, and he has much in scholarship and grant money. He still needs about 14K for the school year. I have excellent credit but want him to have skin in the game, so I am trying to help him find the best loan. I’ve about given up and had thought to simply take out a loan at great interest.

It’s so discouraging reading the horror stories.

What is the best way to handle this? Parent PLUS has a higher interest rate than private loans, and Sallie Mae has a lower rate than the Parent PLUS but, I am not sure what to do. SoFi advertises great rates, so that’s another option.

What do you think?

Student Loan Shopping Basics

Based on this email’s well-thought-out questions, we will assume that this family has decided that 14k in student loans is acceptable borrowing for this school year.

If your family is in a similar situation, you must answer the “should I borrow 14k?” question before answering the “what’s the best way to borrow 14k?” question. $14,000 may not seem like a ton of money for a college education, but over four years, that adds up to $56,000, and we haven’t even addressed the interest. Before borrowing, it is essential to make sure you can afford the payments before getting the loan(s).

Essential Items to Discuss: Every family should discuss their plan to pay for college. These discussions are not easy, but facing hard truths in the present can prevent major hardships in the future. Be sure everyone understands the considerations that go into funding a college education. For some students, pursuing a four-year degree while borrowing minimal student loans is the ideal approach.

Finally, any family considering a private loan should first maximize the student’s federal loan borrowing through the FAFSA. Don’t worry about your family’s income being “too high” for FAFSA loans… financial need only dictates whether or not the interest is subsidized during school. Because the federal government limits borrowing by undergraduate students, families often find themselves in the same shoes as our reader.

If you do find you have to borrow additional money, the question then becomes…

Who should sign for the loan?

There are three possible answers to this question, and all of them have distinct pros and cons.

Option 1: Only the student signs

The huge pro for this route is that loans in only the student’s name won’t impact mom and dad’s credit for what could be decades. As our emailer pointed out, this is also the best way to make sure your child has “skin in the game.” The major downside is that the student may not qualify for a loan on their own. Even if they do, they could end up with a high interest rate.

Option 2: Only the parent signs

By having just a parent sign for the loans, there are a couple of advantages.  First, a parent with an established job and credit history can qualify for better interest rates than an unemployed college student. Second, having the debt on someone else’s credit report will make it easier for the student to buy a house in the future.

Parents have the option of borrowing private loans or selecting a Parent PLUS loan through the federal government.

If there is any concern about mom or dad’s ability to pay back the loan (if the student can’t help), a Parent Plus loan is a route to consider. These loans do not offer the premium repayment plans that normally go with federal loans, such as Pay As You Earn or Income-Based Repayment. However, some built-in protections provide assurances that private loans can’t match.

If the parent can definitely afford the student loan repayment should the need arise, they should find the lowest available rate on the private market. When shopping around, be sure to avoid origination fees and adjustable-rate loans that could skyrocket if interest rates go up across the board. Finding such a loan in just the parent’s name might be tricky, but it could be a good deal in the long run.

Option 3: Parent co-signs the loan

This is probably the most common route, though not necessarily the best. The advantage here is that the student has “skin in the game” but can get better interest on the loan because mom or dad also signed the loan. One downside to having two people on the loan is that it will appear on both credit reports and could potentially limit borrowing in the future. This is a significant consideration if you are thinking about starting a business or buying a home.

The biggest downside is if things don’t go according to plan. IF the student fails to make payments, the lenders won’t think twice about collecting the debt from the parents. IF you co-sign, you must be ready, willing, and able to pay for the debt.

Lenders have also engaged in some strange business practices with co-signed loans. The most egregious one is probably the practice of auto-defaults. Should the co-signer die or declare bankruptcy, some lenders require the loan balance to be immediately paid back in full. The moral of the story: read the fine print on the loans before you sign, and have backup plans in place if the unexpected happens.

The Best Approach

While the cost of attendance and family finances vary greatly from situation to situation, there are a couple of steps to follow.

Make finding a student loan a collaborative effort.

Having students pick out loans by themselves is a mistake. Parents, especially those that co-sign, should help shop around and read the fine print.

The reverse also holds true. Parents should not do all the work and then have their child sign for the loan. All students need an understanding of their responsibilities when it comes to the debt.

Have “skin in the game” from day one.

The average college student has no appreciation for the competitiveness of the job market. Asking an 18-year-old to make an informed decision about tens of thousands in student debt is a nearly impossible task for even the most mature high school student. For this reason, it is critical to show them what it means to have a monthly student loan payment.

The best way to teach this lesson is to require your child to make interest payments during school. They are paying much less than they will at graduation, but it is a monthly reminder of their future burden. Plus, as the student loan balance grows, the monthly payments will also grow. Students who understand the consequences of their college spending will be more likely to be frugal and take out less debt. Plus, if they ever have to take out an additional loan, they will be careful to find the one with the best interest rate.

From a parent’s perspective, if you want your child to be responsible about their debt, tell them you won’t sign for future loans if they don’t pay off the interest each month.

During school is the perfect time to build good financial habits. If the student misses an interest payment, in most cases, there are no late fees or negative credit reporting because the required repayment typically starts six months after school ends. Parents can track their student’s progress, and the student can establish the good habits necessary to avoid late fees and extra interest.

Perhaps the biggest perk of this approach is that you don’t take a beating at the hands of compounding interest. The amount borrowed is the amount owed at graduation.

Finding the Best Student Loan for your Child

Much like picking a college, picking a student loan is a significant decision. Combining family and finance can be a combustible mixture, so take the time to put together a well-researched plan.

Families that elect to go with a private loan will need to shop around. This is because each lender has a different formula for determining the interest rates offered. Often, the lender advertising the lowest rates will not be the lender that actually offers the lowest interest rate. Some lenders may place a bigger emphasis on mom and dad’s income, while others might care more about the students major and college choice. One of the easiest ways to shop around is to use a tool like Credible to find the best loan. Credible has partnered with many different lenders so that applicants can fill out one application and see prequalified rates offered by many lenders.

Putting everything together, three basic questions must be answered by any family:

1. Is borrowing money for this education a good idea?
2. If borrowing is a good idea, what sort of loans should be considered?
3. If a private loan is the chosen route, have we found the best loan available?

Parents Should do More than Help Their Child Find Student Loans

Colleges do a great job of presenting options to pay for school and ensuring that families get the money they need to pay tuition.

These financial aid offices may be the best experts available, but their interests are not 100% aligned with the student. The main objective of a financial aid office is to get the classes paid for. The student is largely on their own when selecting the best route to pay for school.

The post Parent’s Guide to Finding the Best Student Loan for Your Child appeared first on The Student Loan Sherpa.