The cost to attend one of America's colleges or universities can run well over a staggering $40,000 per year. Even for students who opt for cheaper schools, the cost of earning a postsecondary education is often unaffordable without securing a student loan. As a result, many students ask parents to cosign student loans; while most students repay loans without difficulty, cosigners must learn the consequences of default before signing on the dotted line.
The Cosigner's Responsibility
When a parent cosigns his child's student loan, he is agreeing to make payments on behalf of his child if the child defaults. The lender may also request payment from the cosigner instead of the student in the event that the loan is not a guaranteed loan. Guaranteed loans only go after the cosigner for repayment if the original debtor has defaulted. Cosigners are also responsible for late charges and other penalties, including legal fees.
Consequences of Default
If a child defaults on his student loan, the parent's credit rating will suffer. The lender will come directly to the parent if a student misses a payment, and may expect the parent to pay the late fee or penalty. If the parent has secured the loan with collateral, the lender may elect to sell the collateral to secure the loan's repayment. Because the consequences are so severe, be sure that you can afford to repay the loan yourself before agreeing to cosign.
If He Defaults, I'll Just Declare Bankruptcy
Think you can declare bankruptcy to avoid repaying a student loan? Think again. Student loans are one of the few types of loans that must be repaid in full and cannot be discharged in bankruptcy. While there may be the rare exception -- if a debtor becomes severely disabled and is unable to work again, for example -- it is not the rule. As a result, do your homework before agreeing to cosign. It's not unreasonable to ask your child how he intends to repay the loan after graduation.
Best Chances of Recovery
According to Mary Rowland of MSN Moneycentral, lenders and collectors often go after whomever they think they have the best chance of recovering the money from. As Rowland points out, if the lender thought that it had a shot of recovering the money from the borrower, the lender wouldn't have required the cosigner to begin with. Rowland also recommends taking the time during the college years to teach children about the proper use of credit through credit cards. Learning the essentials of debt management will secure the child's credit rating -- while saving the parent's.
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