Dear Alpha Consumer,
I cosigned for student loans for my children, as they could not get financing on their own when they went to college. In addition, I have also taken out student loans for them in my name. We have found that the education loan companies work differently than most business creditors. They do not offer as long a grace period for your monthly payment and report you to credit bureaus very quickly. On a couple of occasions, my children have been late making a loan payment. These incidents were reported to the credit bureau, and my credit score has dropped as a result. We have tried to replace these loans but have been unable to find a lender willing to do so. I am sure I am not the only parent in this situation. Any advice you might have would be very much appreciated.
You did a nice thing for your children by letting them put your name on their loans. Unfortunately, they are doing a not-so-nice thing to you.
From the lenders' perspective, it doesn't matter that you seem to have an arrangement with your children that requires them to make the monthly payments, even though your name is on the loan. To the lenders, you took out the loan, so you are responsible. If your children are going to make late payments, then it will hurt your credit score, and the only way to get around it is to make the payments for them—something you probably don't want to do.
The first step is to explain to your kids that their failure to pay on time is hurting you financially. They might not realize the damage they are causing. If they are still unable to make the payments, consider reworking your agreement with them. Can you lend them money temporarily or pay part of their monthly bill, to ensure the payment will be made? If your kids need help getting to a place where they can meet their debt obligations, perhaps you can give them a gentle lesson in living within their means.
If the late payments seem likely to continue, call the lender. Lenders don't want their borrowers to default; they will work with you (or your kids) to reach a feasible solution, such as a temporary deferral of the loan (interest usually still builds, so this isn't an ideal solution).
"We offer extended repayment plans, or flexible repayment options, to make the payments manageable," says Tom Joyce, a vice president at Sallie Mae. He adds that if a borrower has made 24 on-time payments, then the loan's cosigner (in this case, you) can be released from the loan altogether. Then you can stop breathing down your kids' necks about whether they are writing a check this month, which would probably be a welcome change for you and your kids.
Having your children take out new private loans in their own names to cover the student loan is probably not a good idea, especially if the student loan is federally subsidized at a relatively low interest rate. They will most likely face a much higher interest rate with a private loan, which means higher monthly payments. Even though that wouldn't be your problem anymore, I'm sure you'd like to see your kids remain solvent.
As for restoring your credit score, that will take time. Missed or late payments lower scores temporarily, until you re-establish your credit record by making on-time payments.
As for whether or not student loan companies are quicker to ping your credit score than other types of lenders, Sallie Mae, the largest student loan company, says it is required to report to the credit bureaus monthly. But, he adds, Sallie Mae reports borrowers of federally subsidized student loans as delinquent only if they are 90 days or more past their payment date. Holders of private loans at Sallie Mae are reported after 45 days. While policies will vary by company, credit card companies usually report borrowers after only 30 days.
This won't be much help for you now, but credit experts usually tell parents to avoid getting into this situation in the first place. Paul Wrubel, cofounder of Tuition Coach, says if parents can't help but cosign, then parents should arrange automatic payments from a bank account that they can monitor to ensure it holds sufficient funds. Set up a separate account for this purpose, he suggests, so it doesn't accidentally go into buying a new iPod instead.
And before entering into any sort of parent-child credit agreement, talk out the details. "Before you cosign loans for anyone, make sure you are all in agreement," says Rod Griffin, spokesman for the credit bureau Experian. "It's important for adult children to understand ... if they don't uphold their end of the bargain, they can hurt their parents' credit and hurt them financially in a significant way."
If your kids are coming home for the holidays, it might be a good time to gather them up for a little financial family meeting to discuss the situation and your options.