Here's a riddle for all you trigonometry fans: What do you call it when a student asks dad or grandma to help them take out a college loan to study advanced math?
Getting someone to co-sign so you can study cosines.
A cosine, of course, is an advanced math function, while co-signing on a loan means you pledge to repay the debt if the primary borrower defaults. Much like my own attitude toward engaging in higher math, the general rule on co-signing loans is pretty simple: Don't.
That's because co-signing can hurt your credit if the borrower defaults, and leave you stuck repaying someone else's debt. But a new report from the Consumer Finance Protection Bureau finds that getting a parent or grandparent to co-sign a school loan can also get responsible student borrowers in trouble.
Go it alone on loans
The problem happens with private student loans where there's a co-signer which, in 2011, covered 90 percent of all new private loans. The co-signer usually is a parent or grandparent and if that co-signer dies or files for bankruptcy, the bureau found, many student loan servicers automatically put the loan into default -- even if the student was paying on time with no problems.
Students are then forced to immediately pay the full amount of the loan and, if they can't, their credit is ruined for years to come. That's one reason students should avoid private loans altogether, says Reyna Gobel, author the new book, "Graduation Debt: How to Manage Student Loans and Live Your Life."
"The big thing with private loans is that you have to look at the contract," Gobel says. "It isn't standardized like federal student loans."
Private loans also don't offer all the options that federal loans provide for deferring payments, requesting a forbearance, consolidating loans, basing repayment on the graduate's income or lowering the amount owed for grads who become teachers, firefighters or take other public service jobs.
Make it a federal case
In general, Gobel says students should exhaust federal loans first, even if they have slightly higher interest rates. And don't borrow more than the maximum federal loan limit, which is less than $10,000 a year. Beyond that amount, students risk racking up more debt they can afford.
In the case of co-signed private loans, a co-signer can be removed after the student borrower makes a string of on-time payments, often as few as 12 months. But the Financial Protection Bureau found that some loan servicers make that harder than it should be. The Bureau offers sample letters to request removal at http://www.consumerfinance.gov. You also can call the Bureau at (855) 411-2372.
Whether you're a recent college grad paying off loans or a family member who cosigned, it's best for everyone involved to put the loans solely in the graduate's name, to avoid credit problems or family squabbles.
Or, as the trigonometry whizzes would say, just subtract the co-sign.
(Brian J. O'Connor is an award-winning columnist for The Detroit News. Contact him at firstname.lastname@example.org or visit http://www.funnymoneyblog.com.)
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