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Defaulting On A Co Signed Loan
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Article on Defaulting On A Co Signed Loan
Many students cannot afford a college education on federal aid alone. Some of these students are forced to take private student loans, which are more high risk. As the student has not yet built up credit, it is often required to have a cosigner. Defaulting on a cosigned loan works differently than on federal student loans.
How Default occurs
With Federal student loans, the borrower has between six and nine months after graduation to repay the loan. In addition, federal loans must be overdue for this same amount of time before it is considered in default status. This is not the case with private loans. The terms of each loan are dependent on the lender and the specific loan contract. Typically, defaulting on a cosigned loan occurs as soon as a payment is missed. Additionally, if any contract terms are not met or certain circumstances occur outside of repayment, the lender can consider the loan in default. It is imperative that loan agreements are read thoroughly so that the requirements can be met.
Collection Process
Private lenders do not have as many options to collect a debt as the federal government has on their loans. The collection process for defaulting on a cosigned loan is the same as for overdue car loans or credit cards. Once payments are overdue, the cosigner will be asked to make the payments. A collection agency will be hired if payments have not been brought up to date within a certain time period. If the loan is still not repaid by the borrower or the cosigner, the lender can sue both the borrower and the cosigner for the outstanding loan, late charges, and court fees.
Cosigner Rights and Responsibilities
Being a cosigner is risky business as they are taking on risk that a lender is not willing to take. If the student cannot make timely payments on the loan, the cosigner is ultimately responsible for repaying the loan. As soon as the loan is in default, it shows on the credit report of both the borrower and the cosigner. If the cosigner does ultimately pay the loan, they do have the ability in most cases to sue the borrower.
Additional Cosigner Protection
There are some things that cosigners should do to protect themselves against defaulting on a cosigned loan. Agreements with the lender should be made to be notified as soon as a payment is missed and to be given a set period to rectify the situation before collection activities occur. Contracts with lenders can also be made stating that in case of default the cosigner will only be responsible for the loan principle. Private agreements can also be made between borrower and cosigner to protect the cosigner's interests. These agreements should always be made through an attorney so that they can be legally acted upon in case of default.
If a cosigned private student loan is taken to finance education, diligence should be taken to ensure that all payments are made on time. When defaulting on a cosigned loan, not only credit reports can be harmed but long-term relationships with the people that entrusted the borrower to pay that debt.
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