Mike Davies
June 2016

Parents, Beware of Private Loans – Video

Taking out student loans to help afford a college education shouldn’t be like selling your soul away for the next 10 plus years. For many families, taking out loans from a private lender may seem like an affordable and feasible option. If a borrower is considering taking loans from private loaners, there are many risks that they should consider before making a decision that could destroy their family’s credit and bind them to repaying the debts until the loans are completely paid back.

Private loans typically require a cosigner, which falls upon the shoulders of a parent or guardian. Private loans legally bind the cosigner to the borrower’s finances. In other words, if the debt is not repaid to the private loan agency, then there are serious consequences for anyone that is bound to the contract. Not paying back private loans results in bad credit and risk for placing loans into default. Unlike federal loans, private loans are much less forgiven and are very frigid.

Last year, the Consumer Financial Protection Bureau released a report from their research conducted on the consequences of private student loans. The released information found that 90% of private student loan borrowers who applied to have a cosigner released from an agreement were rejected. Both the cosigners and the borrowers take a huge risk with taking out loans from private lenders. Cosigners risk ruining their credit if the payments are not made on time. On the other hand, borrowers are at risk for having their student loans placed in default in the case that the cosigner dies or goes bankrupt.

Some private lenders are now trying to compete with federal loans by offering lower interest rates. Lenders such as Citizens Bank and Commonbond offer fixed interest rates of 5% on loans to those with excellent credit. In comparison to the Parent PLUS loan that is offered by the federal government, which is projected to be over 6% in the next year, this seems to be a much more affordable option. However, the terms and conditions of private loans are non-negotiable. Private lenders have made claims that they will released a cosigner if the borrower has a good record with repaying back their loans. But the CFPB has found that these releases are not given without having borrowers go through extensive obstacles and hoops, such as giving proof of gradation, a letter from the cosigner, and credit checks.

The CFPB’s findings have made it clear: parents, beware of signing up for borrowing from private lenders. Taking out private loans puts both the cosigner and the borrower at risk for bad credit, being placed in default, and not being eligible for debt forgiveness. Although some lenders may offer lower interest rates on their loans, it is safer to avoid signing a contract with private lenders.


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Mike Davies

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