November 24, 2017
November 24, 2017
Student loans have become so common that both students and their parents may pay little attention to the details. But as is the case with any kind of loan, the details matter! There’s much to be aware of before you sign student loan papers.
Go through all loan documents carefully, and consider having them reviewed by an attorney if necessary. There are many different provisions, depending on the loan you take, and they can be life-changing.
Here are some of the details you need to be aware of.
This is the first and most important consideration with student loans. The rules and terms for federal loans and private loans are very different, even though they serve the same purpose.
Federal loans are provided by the US Department of Education (USDOE), and are therefore guaranteed by the US government. There are different types of loans available, but the rules for federal student loans are similar across the different programs.
Because they are guaranteed by the US government, federal student loans offer very low interest rates. They also provide longer terms, ranging from 15 years to as long as 30 years. Perhaps best of all, federal student loans do not require credit qualifying. That means they generally do not require cosigners.
However, one of the negatives with federal student loans is that they usually require origination fees, ranging between 1% and 4% of the loan amount.
Private student loans are typically provided by banks. They often provide variable interest rates, that are lower than the fixed rates on federal loans. They also offer larger loan amounts, and don’t charge origination fees.
You are required to credit qualify for private student loans, but you can add a cosigner for this purpose. As long as the cosigner has strong credit and income, the loan is very likely to be approved.
This is the case with federal student loans. There are some obscure provisions that would enable you to discharge a federal student loan in bankruptcy, but they won’t apply to the vast majority of debtors (check with a bankruptcy attorney to see if any apply to you). Generally speaking, if you have a federal student loan, there’s no alternative to repaying it.
Private student loans however can be discharged in bankruptcy. But if you have a cosigner on the loan, the bankruptcy discharge will not only hurt your credit, but also the cosignerr’s. What’s more important, your bankruptcy will not discharge the cosigner from the loan. It will merely transfer full responsibility of repayment to him or her.
Private student loans sometimes offer certain hardship provisions, such as a temporary deferral of loan payments. But federal student loans offer several programs to help you if you’re experiencing financial difficulty.
For example, the Income Based Repayment plan (IBR), limits your monthly student loan payment to just 10% of your discretionary income.
There’s also the Public Service Loan Forgiveness Program (PSLF), which enables you to have your remaining loan balance forgiven on certain federal loans. You generally must be employed full-time by a government agency, and have made 120 qualifying monthly payments before the debt can be forgiven.
You may not be able to discharge federal student loans in bankruptcy, but they provide workable alternatives if you have a financial hardship.
This is not the case with federal student loans, since a cosigner is typically not necessary. But it’s common with private student loans. You’ll have to carefully examine the fine print in your loan documents before you sign the papers.
Private student loans involving a cosigner often have an automatic default provision upon the death of the cosigner. The bank may determine you are unable to pay the loan without the cosigner, and therefore makes it immediately due and payable.
It’s possible this clause is included to increase the possibility that life insurance proceeds from the deceased cosigner can be used to satisfy the loan. But it might also be possible to avoid default if you, as the student borrower, are able to make the monthly payments out of your own resources.
If you have a cosigner on your student loan, it’s important to realize that your payment performance will have an impact on your cosigner’s credit. If you make late payments, they will show up on your cosigner’s credit report as late payments. And if you default on the loan, it will show up as the default on your cosigner’s credit as well. (And of course, the lender will then pursue full payment from your cosigner.)
If you have a cosigner on your loan, commit yourself to making all payments on time. It will not only affect your credit standing, but also that of your cosigner. And since that person cosigned the loan to enable you to get your college education, you have an obligation to protect him or her from any negative consequences.
If you do plan to use a cosigner to get a private student loan, see if the lender has a provision to remove the cosigner from the loan. If they do, you’ll be able to have your cosigner released shortly after graduation. If not, your cosigner will be on the loan until it is paid in full.
A cosigner release, even when available, is not an automatic provision. In order for it to happen, you, as the primary borrower, need to be able to qualify for the loan based on your own credit and income. In addition, most banks require evidence that you have personally made payments on the loan for the past 24 to 48 months.
These are just some of the major provisions common in student loan papers. Carefully read any documents before you sign them, paying close attention to any language that seems either significant or confusing. Then get an official explanation before proceeding. Once you sign the loan documents, you’ll be bound by them. For that reason, you need to know exactly what you’re signing before you do.