How do loans work?

Paying for College
1

<p>I will be a freshman.</p>

<p>I know only the basics: there's the Perkins and there's the Stafford. (What's the Stafford again? There's subsidized and unsubsidized, and...what!) There are federal loans and there are private loans...what's the deal? Federal loans are your school's FinAid package, and private loans are loans you seek yourself if there's a difference between COA and FinAid package that you can't afford to pay?</p>

<p>How do loans work? Is there a limit to how much <em>I</em> am allowed to borrow, in my name without a co-signer, over my four years at a private school (be it federal or private)?</p>

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<p>Federal loans include:
Subsidized Stafford (no interest, no payments while in school)
Unsubsidized Stafford (interest accumulates, no payments while in school)
Perkins (no interest, no payments while in school, not as common as Stafford)</p>

<p>Freshman can borrow up to $5500 in their first year of Stafford loan money. The government and the schools determine which loans you get. The FAFSA is the application for the federal loans. The federal loans are pretty much the only loans a student can get without a cosigner.</p>

<p>Private loans such as from SallieMae, Nelnet, Discover, etc are credit based loans and will in all likelihood require a cosigner. No payments are typically required in school and interest accumulates. For credit-worthy borrowers, the private loan companies will typically let you borrow up to the cost of attendance, sometimes a little more.</p>

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<p>Wait, I thought you could get like $9,500 from a Stafford? And is that subsidized or unsubsidized?</p>

<p>Can ANYone with good credit co-sign a private student loan?</p>

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<p>Dependent freshmen can borrow 5500.</p>

<p>Independent freshmen can borrow 9500.</p>

<p>And yes, anyone can sign. Remember, whoever co-signs is equally responsible for your loan.</p>

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<p>A dependent freshman can get $5500 in FAFSA. Of that $5500 up to $3500 may be subsidized if there is need.</p>

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<p>[Student</a> Aid on the Web](<a href=“http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp]Student”>http://studentaid.ed.gov/PORTALSWebApp/students/english/studentloans.jsp). Please read this!!</p>

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<p>All these loans have limits. </p>

<p>If COA exceeds limits on loans (and everything else in the school’s FinAid package), then I MUST resort to private loans, right? For which I would NEED a co-signer?</p>

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<p>*Can ANYone with good credit co-sign a private student loan? *</p>

<p>Only if they qualify. **A person can have good credit, but not the income to qualify to co-sign. ** Co-signing loans is a huge responsibility. Also, when a person co-signs a loan, his own credit is negatively affected. When the co-signer attempts to get a car loan or house loan, he can be denied because he has this other obligation (the co-signed loan). That can be shocking news to the co-signer.</p>

<p>Your post concerns me. It sounds like you’re thinking of borrowing a lot of money. </p>

<p>What is your intended career? </p>

<p>How much do you intend on borrowing each year?</p>

<p>Undergraduates should not borrow large loans, because their incomes after graduation are not typically high enough to pay them back.</p>

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<p>What is the income needed to qualify to co-sign a loan?
How is the co-signer’s credit negatively affected? (Is the credit negatively affected only if the loan is not paid off, or is it automatically negatively affected?)
How would it hurt MY credit? (A large private loan.) Again, does this depend on whether the loan is paid back on-time, or something?</p>

<p>When college students say crazy things like, “I have a $100,000 loan aaahhh!” do they REALLY have that loan, or is that loan only partially theirs? </p>

<p>Also, what are typical interest rates of private lenders?</p>

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<p>*What is the income needed to qualify to co-sign a loan? *</p>

<p>There’s no one answer for that… I can depend on how much you are borrowing, and it can depend on what current debts your co-signer already has (car loan, credit cards, home loan, whatever).</p>

<hr>

<p>* How is the co-signer’s credit negatively affected? (Is the credit negatively affected only if the loan is not paid off, or is it automatically negatively affected?) *</p>

<p>A co-signer’s credit is immediately negatively affected because that is an outstanding debt that your co-signer is also responsible for in the eyes of creditors. Therefore, if your co-signer goes to buy a home or car (or whatever), his potential creditor is going to see that he/she already has this outstanding co-signed loan that he/she is responsible for. Many co-signers are often shocked by this news when they go to get a loan for their own needs. They wrongly thought that co-signing means nothing. It’s not nothing. It’s a big responsibility.</p>

<hr>

<p>* How would it hurt MY credit? (A large private loan.) Again, does this depend on whether the loan is paid back on-time, or something?*</p>

<p>It will immediately negatively affect your credit, because it will show as an outstanding debt (even if you pay on time.) It’s no different than any loan in that regard. If you have a big car loan, and you are paying on time, it still can hurt your chances of getting a home loan (or vice versa). </p>

<p>So, if you have a big student loan outstanding, if you went to buy a car after graduation, the creditor may say, "NO, you’re not earning enough money to pay for your living expenses, your student loans, and the car payment that you want.</p>

<p>How much are thinking of borrowing each year? Are your parents going to co-sign or someone else?</p>

<p>more info below…</p>

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<p>Co-signing a Loan [Co-signing</a> a Loan](<a href=“http://www.ftc.gov/bcp/edu/pubs/consumer/credit/cre06.shtm]Co-signing”>Credit Discrimination | Consumer Advice)</p>

<p>What would you do if a friend or relative asked you to cosign a loan? Before you answer, make sure you understand what cosigning involves. Under federal law, creditors are required to give you a notice that explains your obligations. The cosigner’s notice states: </p>

<p>You are being asked to guarantee this debt. Think carefully before you do. If the borrower does not pay the debt, you will have to. Be sure you can afford to pay if you have to, and that you want to accept this responsibility.</p>

<p>You may have to pay up to the full amount of the debt if the borrower does not pay. You may also have to pay late fees or collection costs, which increase this amount.</p>

<p>Even if you’re not asked to repay the debt, **your liability for the loan may keep you from getting other credit because creditors will consider the cosigned loan as one of your obligations. **</p>

<p>Cosigners Often Pay
Studies of certain types of lenders show that for cosigned loans that go into default, **as many as three out of four cosigners are asked to repay the loan. **When you’re asked to cosign, you’re being asked to take a risk that a professional lender won’t take. If the borrower met the criteria, the lender wouldn’t require a cosigner.</p>

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<p>Thank you for the info.</p>

<p>Still another question…maybe you already answered it, but I’m still unclear:
When college students say crazy things like, “I have a $100,000 loan aaahhh!” do they REALLY have that loan, or is that loan only partially theirs?</p>

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<p>That’s a good link Mom2</p>

<p>My daughter took a business consumer credit course her sophomore year (reluctantly - she needed a 1 credit hour class to keep her full time after dropping a class and none of the classes she would have liked to take had space). She was appalled at what being a cosigner meant and said she would never do it and would never ask anyone to do it for her.</p>

<p>Personally I would never cosign for anyone - not even those near and dear to me. If it was a sum of money I could afford to risk losing (which would not be a large sum at all) I would prefer to lend it directly to the person rather than take the risk of my credit rating being ruined. The cosigner is responsible for the loan and the 1st late payment can go against the cosigner’s score even before they even have a clue a payment is late.</p>

<p>I think a class like the one my daughter took should be required of every student. She ended up finding it interesting and she learned a lot. Much of it was stuff we had already told her but she actually listened when it came from someone else. It was quite funny to be in the receiving end of a bunch of “did you know?” phone calls telling me things I have tried to tell her for years :rolleyes:</p>

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<p>Justagirl - if they have $100k in their name it is likely they have cosigners.</p>

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<p>First of all, **FEW **undergrad college students have $100k in loans. </p>

<p>According to the New York Times, the **average amount of debt **that an undergrad has **at graduation is **about $20k. When you only consider those who went to private schools, the avg debt at graduation is $25k. (With a $25k total debt, the monthly payment will be about $290 for ten years. Even that much can be difficult if early earnings aren’t that high.)</p>

<p>Think about it. Mostly new graduates do not earn enough during those “loan pay back” years to make big student loan payments. A student who borrows $100k will have a monthly payment of at least $1150 per month for TEN LONG YEARS.</p>

<p>The few students who borrow that much for undergrad have had to have parents co-sign those loans. And, perhaps the parents have agreed to help pay back those loans. Any parent/adult who co-signs big loans for undergrads with the expectation that that undergrad is going to pay them back, is NOT doing the undergrad a favor. </p>

<p>You may be hearing such numbers from students who’ve also borrowed for law school or med school or grad school.</p>

<p>Another consideration about co-signing loans. Your co-signer may qualify to sign for your loan the first year, but you have no idea if they will qualify or will be willing to co-sign again for the 3 following years. That could leave you in a bind. Your co-signer could buy something expensive in a year or two, and then not be able to co-sign. </p>

<p>I could be very wrong, but I get the feeling that you’re considering a school that you can’t really afford.</p>

<p>How much are thinking of borrowing?</p>

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<p>Thank you very much for all the info.</p>

<p>mom2collegekids, don’t freak out just yet, haha. I am in the “gathering information” phase. My financial situation is a little odd. Being a senior in high school, I don’t really understand it. But your information about loans has helped me tremendously. I’ve been trying to find answers to these questions for months, but no one else seems to know them! So thank you!</p>

<p>You mentioned that students taking out such large loans “have had to have parents co-sign these loans.” Parents necessarily? Or can it be anyone with good credit? (Yes, I know that generally the only people willing to take out such loans would be the student’s parents, but remember that I’m “gathering information.”)</p>

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<p>It is anyone that is willing to cosign. </p>

<p>As you are a senior, have you applied to any financial safeties? Have you talked to your parents and discovered how much they are willing to pay?</p>

<p>Time is quickly running out (and in many cases it already has) for financial safeties.</p>

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<p>Wow, the FinAid forum is so pessimistic! I know, I know, money is a big deal. But you don’t even know my situation, and I’m just asking basic questions. And already I get the “Time is running out!” LOL.</p>

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<p>Uh… that is why I am ASKING your situation. Sorry for trying to help you, I should know better.</p>

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<p>*You mentioned that students taking out such large loans “have had to have parents co-sign these loans.” Parents necessarily? Or can it be anyone with good credit? (Yes, I know that generally the only people willing to take out such loans would be the student’s parents, but remember that I’m “gathering information.”) *</p>

<p>Yes, anyone with good credit and enough income/assets can co-sign (grandparent, sibling, aunt, uncle, friend, etc). The reason I used the word, “parent,” is because typically only a parent is willing to take on such a huge risk. And, yes, it is a huge risk. </p>

<p>But, like I wrote earlier, there are many risks involved. A person could co-sign for you for your freshman loans, but then take out a car loan the next year and not qualify for the following years when you’ll need your loans.</p>

<p>Since you’re gathering information…consider this.</p>

<p>As a student, you don’t need a co-signer for Stafford loans. If you borrow the max amounts over 4 years, $5,500, $6,500, $7,500, $7,500 then you will have borrowed a total of $26,000. That’s more than the average undergrad borrows. Your monthly payments after graduation will be about $300 a month. That’s a substantial payment for a person in their 20’s and early 30’s since incomes aren’t usually that high at that point. It would be like an additional car payment in addition to your own car payment and living expenses.</p>

<p>So, you may not need a co-signer if you stay within the Stafford amounts, which will still be a substantial amount of debt at graduation. </p>

<p>Don’t listen to the crazies that say, “I’ll have $100k in debt at (undergrad) graduation.” Who wants to follow someone who’s going to be miserable between the ages of 23 - 33 when they have no life because they’re drowning in debt?</p>

<p>Wow, the FinAid forum is so pessimistic!</p>

<p>No, not pessimistic…it’s realistic. As you say, you’re a senior gathering info. That means that you’re uninformed and want to learn. :slight_smile: We’re just trying to give you realistic info so that you don’t end up in a bad situation. :)</p>