How to Ruin Your Finances… Co-sign a Student Loan

Many families arrange for the parents to take out the student loan and have their child repay it. Most don’t realize that the student loan can never be changed to the student’s name, and all lower payment, deferment and discharge options are based on the parent’s situation rather than the students. If the loan goes into default, the parents could have their wages garnished, credit ruined, and be taken to court for the full amount.

Parent PLUS loans are federal student loans issued directly to parents that can never be transferred to the responsibility of the student. These loans are intended to supplement school, state and other federal financial aid offered. A parent fills out a promissory note from the school and funds are sent directly to the school and this loan type stays in name of the parent. 

You can borrow more with a Parent PLUS loan versus a traditional undergraduate student loan. While federal student loans are generally capped for dependent students at $31,000 for the entire undergraduate degree, Parent PLUS loans are capped by the total cost of attendance minus other sources of financial aid.

Parent PLUS loan rates may be a shock to families. While undergraduate loans to students are currently issued at a rate of roughly 4.5%, rates for Parent PLUS loans are roughly 7.1%. An origination fee is an additional charge on top of the interest rate. The current fee is over 4%. Once issued, interest rates don’t change except for a one-time .25 discount for direct debit.

After a six-month grace period from graduation, the repayment of your Parent PLUS loan begins.  The first day after you miss a student loan payment, your loan becomes past due. If you are delinquent on your Parent PLUS loan payment for 90 days or more, your loan servicer will report the delinquency to the three major national credit bureaus. If you continue to be delinquent, your loan can risk going into default.

The consequences of defaulting on a student loan will impact your finances and ability to borrow. These consequences include the following:

• The entire unpaid balance of your loan and any interest you owe becomes immediately due
  
  
• You can no longer receive deferment or forbearance, and you lose eligibility for other benefits, such as the ability to choose a repayment plan
  
  
• You lose eligibility for additional federal student aid
  
  
• It may take years to reestablish a good credit record
  
  
• You may not be able to purchase or sell assets such as real estate
  
  
• Your tax refunds and federal benefit payments may be withheld and applied toward repayment of your defaulted loan
  
  
• Your wages may be garnished. This means your employer may be required to withhold a portion of your pay and send it to your loan holder to repay your defaulted loan.
  
  
• Your loan holder can take you to court
  
  
• You may be charged court costs, collection fees, attorney’s fees, and other costs associated with the collection process
  
  
• Your school may withhold your academic transcript until your defaulted student loan is satisfied
  
  
  Are you a parent enrolled in a Parent PLUS loan? 

We recommend contacting us at Focus Capital Funding Corp for a free consultation about our Student Bailout Program. Based on years of experience, we understand different financial situations and can assist you in reducing the interest rate on your current student loan, lowering the amount of your payments, and qualifying for tax incentives. Ultimately, we are here to help you gain invaluable information to secure a better financial future.