By Randy Hutchinson
President of the BBB of the Mid-South
Reprinted from The Jackson Sun
The Consumer Financial Protection Bureau (CFPB) has issued advice for what cosigners on student loans can do to protect themselves during the COVID-19 pandemic. The CARES Act provides temporary relief for those with federal student loans and many private student loan lenders are also providing options for reducing or suspending payments. The majority of private student loans are cosigned.
Much of the advice is useful for people who have cosigned any kind of loan or credit card account. Before I cover the CFPB’s advice, let me pass on tips on what you should think about before cosigning a loan in the first place. It should not be a casual decision.
Lenders require a cosigner when the primary borrower doesn’t qualify on his own. Cosigning for a child who wants to buy her first car but hasn’t established her own credit yet is one thing. Cosigning for a brother-in-law with a bad credit record is a whole other matter. If you’re asked to cosign a loan, be sure you understand why.
The FTC requires lenders to provide cosigners a notice that explains their obligations, the most important being that if the primary borrower doesn’t pay the debt, the cosigner will have to. That could be the full amount of the original debt plus late fees and collection costs. Some studies have shown that as many as three out of four cosigners end up having to repay the loan. Don’t cosign a loan if you can’t afford to repay it.
The notice also advises cosigners that the lender can employ the same collection methods that can be used against the primary borrower, including filing a lawsuit and garnishing wages. The delinquent debt can become a part of the cosigner’s credit record. Even if the primary borrower is repaying the loan, it could affect the cosigner’s ability to borrow money since the payment will be included in debt-to-income calculations.
The CFPB recommends that cosigners on private student loans stay in regular communication with the primary borrower about the status of the loan. If he misses a payment, it can have long-term implications for the cosigner’s financial well-being. If the borrower is struggling to make payments because of COVID-19, he should contact the lender to request relief. The cosigner may not be able to make the request.
Questions to ask the lender include:
- Do they offer special disaster forbearance or relief options to help borrowers affected by COVID-19?
- What are the necessary steps to request forbearance or relief?
- Are there fees for signing up for a forbearance or relief program?
- Will interest continue to accrue during the forbearance or relief period, or will interest be added to the principal balance at the end of the forbearance?
- How long will this forbearance or relief period last?
- How will missed payments be made up? Will making up for the missed payments lead to an increase in the monthly payment?
- If the borrower is unable to make payments after forbearance or relief ends, is there an opportunity to extend the relief?
Some lenders on student and other loans offer to release cosigners after a certain number of on-time payments have been made and other requirements satisfied. The request will generally have to come from the primary borrower.