Think before you leap to co-sign loan for children

ON THE MONEY

Your Money

July 09, 2006|By GAIL MARKSJARVIS | GAIL MARKSJARVIS,CHICAGO TRIBUNE

My wife and I co-signed $40,000 in college loans for our son, and unfortunately he defaulted because of financial hardships. He was lazy, ignored calls and letters from the lender, and his negligence resulted in our acquiring a poor credit rating.

We have always paid our bills on time and have always had an excellent credit rating. I called the loan officer, who told me that even if we could pay his loan off our credit rating would continue to show up as poor for the next seven years.

We would like to know if we can do anything to restore our excellent credit, while leaving our son with the responsibility of paying off the loan.

- S.G., Minneapolis

Unfortunately, too many parents get caught in this sad situation.

It's easier to avoid than to fix it after the fact. So I'll start with prevention for parents who aren't where you are yet.

At the time parents send their children to college they are frequently overwhelmed with sticker shock, and often feel guilty that they haven't saved more. They are focused on helping their children fulfill their dreams, and want to find a way to do it at the lowest possible cost.

The best route is through federal student loans such as Stafford or Perkins loans, which are backed by the U.S. government and do not require parents to co-sign. But as you probably discovered, the federal government won't let students take out more than $23,000 in Stafford loans for their entire undergraduate education. And during the first year only $3,500 is allowed. When paying for tuition, room and board and books, federal loans fall far short of the $80,000 often needed for four years in a public university and $160,000 in many private colleges.

So, like a lot of parents, you probably turned to a private lender, such as a bank. Typically, banks charge more interest for student loans than those backed by the federal government. And often banks require parents to co-sign the loan application.

But once you co-sign, you are stuck. The lender has the right to hold you as responsible as your child for making payments. And as you have found, the consequences can turn ugly. A bad credit score can end up adding thousands of dollars in extra interest to buying a home or car, and can even keep you from getting credit cards, a job or affordable insurance. (Read more at www.myfico.com.)

You and your child can face the same consequences if you co-sign, but it is critical that parents make sure a student taking out loans realizes the credit risks involved. Graduates should be told in no uncertain terms to respond early to financial problems. Have them read about "loan forgiveness" and "defaulting on student loans" at FinAid.com.

Lenders will delay or reduce payments temporarily for borrowers that encounter financial difficulties, but contacting them after a default or missed payments is usually too late to avoid credit score problems.

Parents who call lenders and simply blame a child for defaulting typically will face an unsympathetic ear. Lenders will remind you that you have a legal responsibility to pay the loan, although they may still be willing to work out loan payments with you. If you appeal for mercy to Fair Isaac, which rolls credit information into your FICO credit score, you will essentially be told that you are wasting your breath. The only way to get a credit score altered is to have a lender report an error to the three credit bureaus that track loan payments, said a Fair Isaac spokesman.

Generally, when parents sign loans for their children, they don't contemplate the possibility of this mess.

gmarksjarvis@tribune.com

Messages for Gail MarksJarvis also can be left at 312-222-4264.

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