Financial and educational experts suggest that students max out federal student loan eligibility before applying for private loans to pay educational expenses. The reason: federal student loans offer more options for loan repayment, forbearance, deferment, consolidation and cancellation.
However, many students find that private loans are necessary to bridge the gap between the cost of their education and the aggregate amount they can borrow from federal loan programs.
As an example, The Association of American Medical Colleges reports the median four-year cost of attendance for medical school for the Class of 2014 at $218,898 for public institutions and $286,806 for private institutions. The aggregate amount medical students can borrow from federal loan programs is $224,000, which includes any undergraduate loan amounts borrowed. Banks, credit unions and other lenders offer private loans to fill this financial gap. The maximum aggregate amount students can borrow in private student loans varies by lender but is generally $120,000 for undergraduate studies, $150,000 for graduate school, $175,000 for law school and over $200,000 for medical school.
Most Private Student Loans Require a Co-signer
According to a 2012 report published by the Consumer Financial Protection Bureau (CFPB) and the Department of Education, more than 90 percent of new private student loans have co-signers; most are family members.
Because eligibility for a private student loan is based on credit history, and many students don't yet have one, securing a co-signer can help a student obtain a loan. Depending on the credit history of the co-signer and the particular lender, the student may also be eligible for a lower interest rate.
Three Co-Signer Considerations
Because co-signers want to help the student with his or her education and assume that the student will be able (and willing) to repay private student loans, many don't carefully read what their obligations might be if things don't go according to plan. Potential co-signers should consider the following:
- A co-signer is responsible for repayment if the student is unable or unwilling to repay the loan.
- Nonpayment or late payment of the loan by the student borrower can adversely affect the co-signer's credit.
- The student loan amount is considered a contingent financial debt against the co-signer's credit if, for example, the co-signer plans to take out a loan to buy a vehicle or refinance a home loan.
Co-signer Problems and Solutions
Unfortunately, reports the CFPB in an April 2014 Mid-year update on student loan complaints, a substantial number of the loan complaints they receive are related to co-signer issues. Debt expert Steve Rhode recently named these two co-signer issues as top concerns:
- Lenders that default student loans if the co-signer goes into bankruptcy or dies even if the loan is in good standing.
- Getting the co-signer requirement released even when the borrower has met the "co-signer release" standards advertised by the lender.
Both students and co-signers have resolution options should one of these issues arise. The CFPB is an independent agency of the U.S. government established by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Its mission is to educate consumers, enforce federal consumer financial laws and gather and analyze data related to financial practices. Its website offers sample letters that borrowers and co-signers can send to lenders to elicit additional information on a collection issue as well as information on how to proceed with a complaint if the problem is not satisfactorily resolved by the lender.