Unlike other forms of consumer debt, student loans receive special protections under current laws ranging from collection to bankruptcy. This special status applies not only to the primary borrower (the student) but also to any co-signer on the loan.
Student loans are one of the hardest types of debt to shake. Current U.S. bankruptcy law allows a court to discharge these loans in bankruptcy only in the narrowest circumstances. In fact, the legal requirements for discharging education loans are so formidable to meet that most bankruptcy attorneys avoid student loan cases altogether.
Since so few loan borrowers qualify for bankruptcy discharge under the law, the vast majority of loan debt is carried until the borrower repays the loan or dies — although some non-federal student loans even survive death, passing the debt on to the borrower’s co-signer.
Co-Signer Requirements of Student Loans
Most government-issued student loans don’t require a co-signer. Federal Stafford student loans and Perkins student loans are awarded to students without a credit check or co-signer. The one exception would be federal Grad PLUS loans, which are credit-based graduate loans.
Federal PLUS loans for parents are also credit-based and may, in certain cases, require a co-signer for the parents to be able to take out the loan. However, the credit requirements for federal PLUS parent loans and for federal Grad PLUS student loans are much less stringent than the credit requirements for non-federal private student loans.
Private student loans are credit-based loans issued by private lenders or banks. Under current credit criteria, most students, who typically have little or no established credit history, will require a co-signer in order to qualify for a private student loan.
Typically, a co-signer is a relative who agrees to pay the balance of any co-signed loans if the student fails to repay the loan, although a family relationship is not a requirement. A student may have an unrelated co-signer.
Federal Student Loans vs. Private Student Loans
Government-backed federal student loans come with certain payment-deferment and loan-forgiveness benefits. Borrowers who are having difficulty making their monthly loan payments may be eligible for up to three years of payment deferment due to economic hardship, along with an additional three years of forbearance, during which interest continues to accrue, but no payments would be due.
For borrowers who are on the government’s income-based repayment plan, any outstanding federal college loans can be discharged prior to full repayment if the borrower has made her or his monthly loan payments for 25 years. Borrowers who go to work for the government or the public sector can have their federal college loans forgiven after 10 years.
Federal college loans can also be forgiven in the event the borrower dies or becomes permanently disabled.
Non-federal private student loans, on the other hand, aren’t required to offer any of these payment-deferment or discharge provisions. It is at the lender’s discretion whether to offer a struggling borrower deferred or lower monthly loan payments and even whether to discharge the private student loan upon the borrower’s death or permanent disability.
Without any special dispensations from the lender, private student loans will generally remain in repayment until the note is satisfied or charged off as a default, no matter how long the repayment process takes.
The Legal Implications of Co-Signing on Student Loans
A loan co-signer has all the same legal responsibilities as the primary loan borrower and has a legal obligation to repay the loan debt under the same terms as the primary borrower. The co-signer is really a co-borrower and is equally responsible for repaying the co-signed loans.
Unfortunately, too many co-borrowers realize this truth very late in the game.
If you’ve co-signed on someone’s loans and your primary borrower makes all of her or his payments on the loan on time and as planned, you may never hear from the lender. If your primary borrower starts missing payments or payment due dates, however, the lender will contact you.
Normally, by the time the lender is contacting you, the loan you’ve co-signed is already past due, and your credit rating may have already taken a hit.
Keep in mind, too, that any legal remedies a lender has at its disposal for pursuing a loan debt can also be applied to the co-signer. These legal remedies include assignment of the delinquent loan account to a debt collection service and a possible court action. For delinquent federal education loans, the government may seek to garnish your wages or seize any income tax refunds you have coming your way.
In addition, delinquencies or a default on any loans on which you’ve co-signed will appear on your own credit report with all the same adverse effects as on the primary borrower’s credit report. The debt from any co-signed loans will also remain on your credit report as an open obligation until the debt is repaid (or written off in the event of a default).
4 Tips for Protecting Yourself as a Co-Signer on a Student Loan
So should you co-sign on a student loan? You can never predict the future, and unfortunate circumstances can derail even the best-intentioned and responsible student borrower.
If you do decide to co-sign on a loan (or any other loan, for that matter), make sure you clearly understand what your responsibilities are and under what circumstances you would be expected to take over the note:
1) Have a firm understanding with your primary borrower about the repayment plan — you may even want to consider putting a signed, written agreement in place between the two of you — and stay in contact with the lender to make sure that the monthly loan payments are being received on time and as agreed. If your primary borrower misses a payment date, contact her or him immediately to discuss the problem.
2) Work with the lender to ensure that you receive duplicate copies of monthly statements, and periodically check your credit report to make sure your credit is still in good standing. Also, bear in mind that being a co-signer on an outstanding loan may reduce your overall creditworthiness since the loan debt will be viewed as a liability.
3) If your primary borrower communicates to you that s/he is having difficulty making the monthly loan payments, contact the lender immediately. For federal college loans, ask about your loan deferment and forbearance options. Private student loans generally don’t offer the same deferment and forbearance benefits as federal student loans, but some private student loan lenders may be willing to discuss a deferred payment arrangement or alternative payment plan.
4) If your primary borrower misses a payment or stops making payments altogether, you’ll be expected to take over the loan payments. You may have legal recourses with regard to the borrower, but those are separate from the legal obligations of the loan itself. The lender will be looking to you, as a co-signer, to make the monthly loan payments until the primary borrower can resume responsibility for making the payments her or himself.
In the current economic climate where loans are not so readily available as they used to be it is useful to know what your options are before applying for a loan.
A secured loan is a loan that is secured on your property, and is available to people that have a mortgage on their property who also have enough equity left in their property. The maximum LTV (loan to value) allowable if you have a good credit history is currently 85% i.e. the total of your loan and mortgage debt must be less than 85% of the value of your property. One of the main benefits of a secured loan is that the lender is more likely to lend you money because they put a second charge on your property (behind the charge that your mortgage lender has in place) which makes the loan a safer bet for them if you default on your repayments. You can also borrow larger loan amounts for longer terms than you can with an unsecured loan.
An unsecured loan is a loan that is underwritten based on your personal circumstances, i.e. the lender will look at your income and your outgoings and they will also look at your credit record. Although the loan is unsecured the lenders are more likley to lend to homeowners than they are to tenants, for the simple reason that should you default on your repayments the lender will look to put a charge on your property in order to recover their money. Unsecured loans are generally available for smaller amounts usually up to £15,000 and for shorter terms they are also only available to people that have a good credit record with no CCJ’s defaults or any other type of bad credit problem.
A guarantor loan is a loan that is offered to people that can provide a suitable guarantor (co-signee), the applicant does not need to have a good credit record as the loan is underwritten on the guarantor’s credit record. To be suitable the guarantor must be an employed homeowner with a good credit record. If the applicant defaults on the loan in any way the lender will go to the guarantor to reclaim their money, which is why the lenders are not too worried about the applicants credit record. The main benefit of this type of loan is that it is available to people who have bad credit, CCJ’s default’s etc, and can be used to help towards improving your credit record by maintaining your repayments. The main problem with this type of loan is the interest rate that is charged is usally higher than any other type of loan.
A payday loan is a short term loan for a small amount of money usually up to £1,000 that is repaid in full on your next payday. To qualify you will need to be in full time employment and be paid directly into your bank account, you will also need to be aged 18 or over and have a debit card. They should only be used as a stop gap loan to get over any short term difficulty that needs to be dealt with before your next pay cheque. The interest charged is usually quite high, in most cases the lender will charge £25 for every £100 that you borrow. The biggest draw back is that you must repay the loan in full on your next payday, which is why you must have a debit card associated with your bank account, because the lender will automatically deduct the full amount from your bank on your next payday.
A logbook loan is a loan that is secured on your car log book. Loans are available up to £25,000 and to qualify your car must be free of finance and you must be aged 18 or over and the legal owner of the car. This type of loan is available no matter what your credit history but the interest rate that is charged is usually quite high (you should always check how much the loan will cost you before you sign the agreement).
A personal loan is another name for an unsecured loan and as such is only available to people with a good credit history and for amounts up to £15,000 and for terms up to a maximum of 10Years in most cases the lenders will only lend for up to 5 year terms.
Debt Consolidation Loans
A debt consolidation loan is a loan that is taken out in order to consolidate any loans, credit or store card debts into just one loan in order to reduce your monthly commitments and can be secured or unsecured. When used wisely a debt consolidation loan can help to reduce your monthly commitments and get your finances back on track. However if you take out a consolidation loan it is always advisable to destroy your credit and store cards to ensure that you do not start accumulating your debts again. Failing to do so can often leave you in a worse situation than you were in the first place.
John Davies writes for The Loans Information Site [http://www.theloansinfosite.com/] where visitors can find out what they need to know about all types of loans, finance and credit [http://www.theloansinfosite.com/].
Near the end of September 2010, President Barack Obama signed a Small Business Bill into effect. The new bill set aside $30 billion for small business lending. The law also includes $12 billion in tax breaks for small companies. This bill was signed into effect as a response to the 9.6 unemployment dissent in America. President Obama and the administration signed the bill to demonstrate an effort to decrease the unemployment levels in the United States. President Obama hopes that the loan will create as many as 500,000 new jobs within the next couple of years.
Small Business Jobs Act 2010 Changes
The Small Business Jobs Act includes the Recovery Act Loans Extension that provides $14 billion in lending support. Small Business Administration (SBA) Recovery loans will be extended under the law with a 90% guarantee and reduced fees. At the time that the bill was signed, 1,400 small businesses were waiting for funding. Since the signing of the Recovery Act, 70,000 Recovery loans have been supported. Over $680 million dollars have created $30 billion in lending support.
The bill supports higher loan limits, and the maximum loan sizes increased in the pre-established loan programs. The new bill also increases the 7(a) and 504 loan limits from $2 million to $5 million. Manufacturers may receive up to $5.5 million. The 7(a) loan program is one of the most flexible loan programs offered for start ups and existing small businesses. Most of these loans are gained through commercial lending institutions. The 7(a) loan program includes an Export Loan program and a Rural Lender Advantage program. Some businesses will be able to refinance and incorporate their commercial real estate mortgages into the 504 loan program. However, this only applies to owner occupied units.
Microloan limits increased from $35,000 to $50,000. These loans are designed to help entrepreneurs with large start-up companies and small businesses owners in underserved communities. The new bill also increases small business eligibility for SBA loans. They make this possible by increasing the “alternate size standard” to small businesses with less than $15 million in net worth. This also applies to those businesses with less than $5 million in average net income. The law also increases the amount of Small Business Administration (SBA) Express loans from $350,000 to $1 million. Working Capital and Commercial Real Estate Refinancing received temporary enhancements to assist small business owners.
The tax cuts include the following:
– More Deductions for Start Ups
– Deductions for Cell Phones provided by the Employer
– Self Employed Health Insurance Deductions
– Penalty limitations for small business tax reporting errors
– Accelerated or Bonus Depreciation
– Provisions for up to Five Years of Net Operating Losses
– Up to $500,000 for Small Business Expenses: The Highest Expense Ever
Fees Associated with the SBA Loans
Fees are assessed to offset the costs of the SBA loan to the taxpayer. Lenders are charged a guaranty fee and servicing fee for each approved loan loan. The fees are a percentage of the amount loaned to the borrower. The lender may charge the guaranty fee upfront. However, the borrower is not responsible for the lender’s annual fee.
ARC Loans are small business loans that do not carry any associated fees. In the past, the fees for loans were between 1% and 3.5% of the total cost of the loan. ARC loans offer 100% guaranty from the SBA to the lender. No fees are required to be paid to SBA. Many of these loans are provided over a six month period. The repayment of the principal of the loan may be deferred for 12 months after the final disbursement of the loan. Repayment may last as long as five years. The best candidates for this type of loan are companies that have been profitable in the past, but are currently struggling. These companies may have begun to miss payments recently because of financial hardship. These funds may be used to make payroll, buy inventory or improve core operations.
Lenders will be charged an annual fee of 0.55 percent of the guaranteed portion of 7(a) loan. The fee will only be assessed to the balance of the loan and not the entire loan amount.
Borrowers will pay an annual fee of 0.749 percent on the outstanding balance of the 504 loan. This amount increased from 0.389 percent. Loan interest rates may not exceed 4.75% and may be as little as 2.25% when negotiated through a bank.
How Long is the SBA Loan Process?
Since the Small Business Administration is a guarantor and not a lender, the amount of time required to approve the loan will vary. The Small Business Administration attempts to reach its decision within seven to 21 business days from the receipt of the application. To accelerate the process, applicants should have several components of their application in place.
The length of time it takes for the SBA to respond to the application depends on the loan program your business elects to apply to. A business plan with financial statements is required for all loan programs. Earnings projections and collateral offerings must be established. In general, the SBA microloan is the least time consuming application and will be approved the fastest. The maximum loan amount was increased to $50,000. The funds cannot be used to buy property or pay debt.
Top Five SBA Loan Lenders
The banks have sorted SBA lending by region. Some of the most prominent banks involved in lending are the following:
Wells Fargo Bank
Wells Fargo managed a No. 1 ranking between October 1, 2009 and September 30, 2010 for the Small Business Administration 7(a) loan. The bank issued 91 SBA loans with a total value of $31.9 million. The bank was the second leader in terms of ARC loans. The bank issued 23 loans for a combined value $710,100.
JPMorgan Chase Bank
Chase Bank issued 33 ARC loans with a total value of $935,100. They ranked No. 1 in this category of loans issued.
Mortgage Capital Development Corporation
This particular bank issued the most 504 SBA loans. Businesses may use these loans for real estate purchases, property constructions and upgrades.
This bank issued 71 SBA loans for a combined value of $54.1 million. Nearly, 56 of these loans were 504 loans. The loans had a total combined value of $48.9 million.
Capital Access Group
Capital Access Group issued 51, 504 loans for combined value of $37 million.
Rates of Top Five SBA Loan Lenders
Typically, 3.5% of the SBA amount is due at the time of the loan. However, the fee may be financed. An origination fee may include bank fees. A fixed or variable interest rate will be negotiated by the bank for the Wells Fargo portion of the loan.
A guaranty fee of 1% to 3.5% of the guaranteed amount must be paid by the lenders. The lender must also pay the annual fees of 0.25%. The lender may pass the guaranty fees onto the lender, but not the annual fees.
Mortgage Capital Development Corporation
This bank charges 0.389% of the balance of the loan for fees.
Most 504 loan programs will pay up to 90%. Therefore, most borrowers only have to make a 10% down payment. This bank offers a 4.39% interest rate to those seeking a loan. The fees are typically 1% or less.
Capital Access Group
Businesses may get up to 90% financing with a SBA loan. The interest rates are 4.40%. The fees are typically 1% or less.
Copyright (c) 2010 Trey Markel
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