Why co-signing a loan, especially a student loan, can be a costly move
Dear Liz: I co-signed a student loan to help a 31-year-old woman complete her schooling to become a nurse. I know this was something I should not have done, but I just could not refuse her. I did not realize that because no payments had to be made until after the student’s graduation, the loan amount would double. I am looking into a life insurance policy on the student to protect my interest.
Is there any advice you can provide me other than paying off the loan? I know the student can complete a form to take me off this loan, but she will not qualify on her own.
Answer: She may not be able to take you off the loan now, but hopefully she can within a few years of graduation. Most private lenders will allow a co-signer to be removed from a student loan after a certain number of on-time monthly payments, typically 12 to 48. If she has good credit and a decent income, she also may be able to refinance this loan with another lender to get you off the note.
In the meantime, you’ll want to protect your credit, because a single missed payment can damage your credit scores. Contact the lender to find out what notice, if any, you’ll get if she falls behind on payments. Discuss with her the importance of making payments on time, every time, and ask her to contact you immediately if there’s any chance that won’t happen.
Just as many people don’t realize that they’re putting their good credit in the other person’s hands when they co-sign a loan, many also don’t realize what can happen if they take a lender up on its offer to defer payments until graduation.
The loan amount swelled because of something known as capitalization. Because payments aren’t being made, the unpaid interest is being added to the loan amount and dramatically increasing what the two of you owe.
If the loan were a subsidized federal loan, the government would pay the interest while the student was in school. With unsubsidized federal loans and private student loans like the one you signed, it’s smart to start making payments immediately to avoid capitalization and having to pay interest on interest.
Social Security’s widespread benefits
Dear Liz: I encourage you to educate your readers about the real intention of Social Security, as well as the real problem facing it. Social Security was designed as a safety net to keep the elderly, disabled and orphaned from abject poverty. It was not intended to provide decades of benefits to individuals who are not at risk of living in poverty. It does no good to further the inaccurate notion that everyone is entitled to “their share” from a social safety net meant for the poor.
Answer: You’ve misunderstand Social Security’s structure and its history.
Social Security was deliberately created as a social insurance program, not as welfare assistance. Workers fund the system themselves through payroll taxes. They have to pay into the system a certain number of years to qualify for benefits. In return, they receive inflation-adjusted income that they can’t outlive and that isn’t vulnerable to market downturns.
Social Security benefits are progressive, which means they’re designed to replace more income for a lower-paid worker than a higher-paid one. But people who pay more into the system get larger benefits than those who pay less, and benefits are not means-tested.
Programs for the poor tend to be easy targets for politicians, but Social Security’s universal nature contributes to its widespread support. More than 1 out of every 6 U.S. residents, or about 62 million people, collected Social Security benefits in June 2018.
Liz Weston, certified financial planner, is a personal finance columnist for NerdWallet. Questions may be sent to her at 3940 Laurel Canyon, No. 238, Studio City, CA 91604, or by using the “Contact” form at asklizweston.com. Distributed by No More Red Inc.
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