co-signer of a student loan
December 29, 2008 by app2usadvisor
Filed under Funding, Money Matters
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Applicants to US universities like to explore and exhaust every potential source of funding. With drying up of fellowships and scholarships, students explore education loans offered in their home countries and in USA. Very few loans are available to international students.
Almost all personal loans in USA are tracked via credit reports. Each individual has a unique social security number and a credit file. These credit files are maintained by 3 agencies, transunion, experion and Equifax. Those with bad history of repayment or excessive debt may not get loans. Even in case of US citizens, those with no credit history have a tough time getting any loan. Obviously, international students have no credit file or history, so most banks do not consider them for loans. Some US based financial institutions do offer loans to international students IF they provide a co-signer who is a US citizen or resident. Some admission offers are accompanied with such letters which indicate that loans are available if you have a US co-signer. Students get all excited since they ‘know’ someone in USA they will ask them to co-sign a loan, even to casual acquaintances like college senior, someone from the same hometown, a distant cousin etc etc.
Now this brings us to the focus of our post – what it means to be a co-signer of a loan? Well, for all practical purposes, it is a loan taken by the co-signer. If you are asking your US based uncle ‘just to sign’ a loan, you are actually asking him to take a loan for you, where you will enjoy the benefits and he will suffer all the consequences. Now what can be a disadvantage to a US resident for simply co-signing a loan? A lot. First and foremost, that person is solely responsible to payback the loan, as you anyway do not have a credit history. When a person takes a loan, his or her credit score goes down and the amount taken shows up on the credit history – making is costlier and difficult to get any more loans in the future.
As you get some idea about the seriousness of co-signing a loan, we suggest you be very careful if you ever ask some close relative in USA to sign your loan. Also understand that they are very likely to say no, due to reasons explained in this blog post.
This is a thought provoking post.
I am not a financial expert, but have some information that may be important.
I have a few thoughts to add.
1. A cosigner is a second person who signs on a loan in case the person taking the loan can’t pay it. Since uncle in US has to be totally responsible he is not the cosigner he ‘owns the loan’ so to speak, since the student in India has the luxury of not having his or her name on this loan anywhere.
But also…
2. The loan can not be termed a student loan because student loans can only be awarded to those who are currently students. They have to present to the bank a letter of acceptance from the college the loan will be applied to. This means…
3. The loan most likely has to be a ‘equity line of credit’ or a ‘home equity line of credit.’
Home equity line – These loans are taken out against the amount a person has invested in their home. In some cases, if these are in default, a person can loose their home. (This has led to the housing crisis in US)
Regular equity- generally offered by credit card companies, rarely by banks not affiliated with credit cards.
Regular and home equity credits may have a higher interest rate than a standard student loan. Also with the situation today’s economy in US is in, having one of these awarded is rare unless you have a good FICO score. This score is calculated on how much debt a person has and how good they are at paying it off (paying it on time, in full, etc.).
So, if you have an uncle in US take out a loan for student loans, he may compromise his FICO score, making it harder for him to get credit cards and loans later for himself if required.
Another concern is that student loans typically do not have interest applied to it or have to be paid back until you graduate and can be put on deferment (sometimes at zero % interest) if you are, for instance out of work or go back to college. However with the loans an uncle would have to get for a student from abroad, these loans generally will have to be paid back from the following month at the given interest rate of the bank which is calcuated on a daily basis generally. So if it can’t be paid back in the next month or so, the payments increase incrementally. There are chances credit card companies give out ‘loans’ with 0% interest for 6 months to a year, but if the loan is not paid off in full before the 0% interest period ends, interest is applied either on the entire balance or what is left over (depending on the bank’s fine print).
Hope this is helpful.
alaivani,
Thanks for the insightful comments.
Your blog http://alaivani.com/ is interesting.
-app2us advisor
Thanks app2us. I been following your blog for about 6 months. You provide a lot of good information.