Student Loans Can Ruin Parents' Credit
Dear Alpha Consumer,
I cosigned for student loans for my children, as they could not get financing on their own when they went to college. In addition, I have also taken out student loans for them in my name. We have found that the education loan companies work differently than most business creditors. They do not offer as long a grace period for your monthly payment and report you to credit bureaus very quickly. On a couple of occasions, my children have been late making a loan payment. These incidents were reported to the credit bureau, and my credit score has dropped as a result. We have tried to replace these loans but have been unable to find a lender willing to do so. I am sure I am not the only parent in this situation. Any advice you might have would be very much appreciated.
You did a nice thing for your children by letting them put your name on their loans. Unfortunately, they are doing a not-so-nice thing to you.
From the lenders' perspective, it doesn't matter that you seem to have an arrangement with your children that requires them to make the monthly payments, even though your name is on the loan. To the lenders, you took out the loan, so you are responsible. If your children are going to make late payments, then it will hurt your credit score, and the only way to get around it is to make the payments for them—something you probably don't want to do.
The first step is to explain to your kids that their failure to pay on time is hurting you financially. They might not realize the damage they are causing. If they are still unable to make the payments, consider reworking your agreement with them. Can you lend them money temporarily or pay part of their monthly bill, to ensure the payment will be made? If your kids need help getting to a place where they can meet their debt obligations, perhaps you can give them a gentle lesson in living within their means.
If the late payments seem likely to continue, call the lender. Lenders don't want their borrowers to default; they will work with you (or your kids) to reach a feasible solution, such as a temporary deferral of the loan (interest usually still builds, so this isn't an ideal solution).
"We offer extended repayment plans, or flexible repayment options, to make the payments manageable," says Tom Joyce, a vice president at Sallie Mae. He adds that if a borrower has made 24 on-time payments, then the loan's cosigner (in this case, you) can be released from the loan altogether. Then you can stop breathing down your kids' necks about whether they are writing a check this month, which would probably be a welcome change for you and your kids.
Having your children take out new private loans in their own names to cover the student loan is probably not a good idea, especially if the student loan is federally subsidized at a relatively low interest rate. They will most likely face a much higher interest rate with a private loan, which means higher monthly payments. Even though that wouldn't be your problem anymore, I'm sure you'd like to see your kids remain solvent.
As for restoring your credit score, that will take time. Missed or late payments lower scores temporarily, until you re-establish your credit record by making on-time payments.
As for whether or not student loan companies are quicker to ping your credit score than other types of lenders, Sallie Mae, the largest student loan company, says it is required to report to the credit bureaus monthly. But, he adds, Sallie Mae reports borrowers of federally subsidized student loans as delinquent only if they are 90 days or more past their payment date. Holders of private loans at Sallie Mae are reported after 45 days. While policies will vary by company, credit card companies usually report borrowers after only 30 days.
This won't be much help for you now, but credit experts usually tell parents to avoid getting into this situation in the first place. Paul Wrubel, cofounder of Tuition Coach, says if parents can't help but cosign, then parents should arrange automatic payments from a bank account that they can monitor to ensure it holds sufficient funds. Set up a separate account for this purpose, he suggests, so it doesn't accidentally go into buying a new iPod instead.
And before entering into any sort of parent-child credit agreement, talk out the details. "Before you cosign loans for anyone, make sure you are all in agreement," says Rod Griffin, spokesman for the credit bureau Experian. "It's important for adult children to understand ... if they don't uphold their end of the bargain, they can hurt their parents' credit and hurt them financially in a significant way."
If your kids are coming home for the holidays, it might be a good time to gather them up for a little financial family meeting to discuss the situation and your options.
Tags: credit | loans | student loans | paying for college | credit scores
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Reader Comments
Student Loan Debt
I agree with the author that payments need to be made on time but the parents are requesting information about an issue that is not being addressed here or anywhere else that I can find. I don't know if it was intentional on the part of the article author or not. The cost of education has gone through the roof - it is impossible to get classes at state and local colleges because of cuts in funding at the state and fed level due to "other priorities" As a result if a student wants to graduate by the time they are thirty or if they are going back to school later in life loan debt - and huge loan debt is a reality. Loan companies also know they have students cornered so they charge obscene interest rates, 17% and up is not unheard of. They also will not work with you if your forbearance and deferment time has run out, assuming you had any to begin with. Sallie Mae does service loans but they are some of the more fair. That being said they are also incredibly tight with who and what they will add to a loan. I personally had only a very small part of my loan debt consolidated by Sallie Mae. They would not consolidate other lenders - only their own loans. Those other lenders also refuse to consolidate instead gouging me with high interest rates and a short pay back period. Private Student Lenders are the credit gougers of the new millenium and as a result our children can't compete with the world economy and more and more of our jobs will get shipped over seas and it will get harder and harder to find a job in this country. We can't afford to work for 15 dollars an hour if we pay 200,000 dollars for an education. Maybe I am missing something but it seems pretty simple economy to me.
Article Innaccuracies
The author of this article missed the boat completely. Has this author been hiding under a rock???
1) Students do not need co-signers on federally subsidized student loans (i.e Stafford), so the author is VERY confused.
2) The student probably has private student loans as it is, and that is what the parents are referencing. Private student loans can be guaranteed via a non profit agency. However, they carry variable rates, certainly not " relatively low interest rates"
I am smelling an air of poorly researched journalism, especially considering the considerable controversy regarding student loan arrangements, the rising costs of tuition, and the ongoing fears of increased defaults.
Shame !
Predatory Student Loan Debt
When I was in school, I had every intention of paying back my loans and hoped i would be successful. I was told that my social security was exempt from collection and could not be touched by any creditor as well as student loan creditors if I was unable to pay.
Now I am on a fixed income of social security disability, and HESC and Sallie Mae are garnishing my social security payments for the past 1 and 1/2 years making it impossible for me to support myself and get the most basic of necessities.
If I had been warned that my social security would be at risk, when I was in school, I would have never taken out any loans and would have not gone to school, and would not have incurred student loan debt. That would have been better for me than to be in this trapped situation being hounded every day by the Government and their education policies. Not only do they garnish my social security 15% every month, but they phone me 3x a day every day of my life demanding that I pay up what I owe and have added obscene interest rates and collection and court fees and they have never taken me to court. Sallie Mae and HESC are ruthless predatory student loan lenders.
I have learned more about this and what they are doing to millions of other students at htttp://www.studentloanjustice.org
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Federal loans first
One important issue that's not addressed in this article is that student loans from the Federal government (the Stafford and Perkins Loan programs) never require a co-signer. Amounts that students can borrow using these programs are limited, but anyone looking into doing any borrowing for college costs should make sure that these options have been exhausted before looking to any private loans that require co-signers. The Federal loans also almost always have lower interest rates and better terms than private borrowing.
Dec 20, 2007 15:27:20 PM [permalink] [report comment]