Being a Student Loan Cosigner Can Be Risky

  4/8/2014 by    in Private Student Loans   26 Comments

Student Loan Co-SignerLast night, my daughter ran into my room brimming with excitement about a theatre school in New York City that she absolutely must attend next year. Being the proud ‘drama mama’ that I am, I didn’t simply shoot her down. Instead, we paid a visit to the school’s website. Everything looked amazing, but there didn’t seem to be any mention of tuition or fees. Intrigued, I searched for the ever-elusive Net Price Calculator that schools are expected to post on their websites. Surely this would tell me what my daughter’s dream school was going to cost me, right? I punched in our income figures, answered a few general questions, and up popped a number that made me suddenly sick to my stomach. Even after scoring a potential $4,000 scholarship, and taking out the maximum in student loans ($5,500), our responsibility would be a whopping $35,000 per year. Ouch! The number, however, didn’t seem to deter my daughter. She simply turned to me and said, ‘You can co-sign on a private student loan with me, right?’ Technically, the answer is yes. My husband and I both have good credit, but should we help finance this expensive dream? Before co-signing on any student loan, whether for your child or a friend, here are some things you should consider.

1. History May Repeat Itself

If the person requesting your help to cosign a private student loan has a history of not following through on promises, doesn’t have a history of making good financial decisions, or can’t seem to save any money, you may want to reconsider signing your name to a student loan agreement. Remember, you are equally responsible for paying back the loan. If the borrower fails to make his/her payments on time, you can be sure the lender will come looking for you.

2. Your Credit Could Be Damaged

You may have great credit right now, but taking out a large student loan could make it more difficult for you to take out other loans or credit cards. If you think you may want to make a major purchase, such as a car or a new home, you may not want to co-sign at this time. Additionally, you must be prepared to have your credit score lowered should the other person fail to make payments on time. It only takes one missed payment to negatively affect your credit score.

3. The Loan Obligation Goes Beyond the Amount Financed

The amount borrowed is not the amount the borrower will end up paying over the life of the loan. Deferment, forbearance and interest can add a hefty amount to the total cost of the loan. If you become responsible for repaying the loan, you need to consider that your obligation will include the amount borrowed, accrued interest and any other fees incurred during the course of repayment.

4. The Debt Could Hurt Your Relationship

It’s not uncommon for students to default on their loans. In fact, nearly 7% of private student loan borrowers in repayment are seriously delinquent or in default as of Q3 2013. If you decide to co-sign on a student loan, you must be prepared to assume that debt if the borrower fails to make their payments. If you are financially unable to make the payments, it can have serious repercussions. Not only will your credit suffer, but also your relationship with the other person on the loan. I have seen money pull families apart all too often, so think long and hard before you take out any loans you can’t afford to repay.

5. It’s Very Difficult to Remove Yourself From the Loan

Don’t co-sign a student loan with the expectation that you can simply remove your name at a later date. Although most lenders offer a co-signer release, there are some hoops the borrower must jump through first. One, depending on the lender, he/she must make consecutive, on-time payments. This can be as few as 12 months (Sallie Mae) or as many as 48 (SunTrust). In addition, the borrower must provide proof that he/she meets income requirements and has a satisfactory credit score. There is no guarantee that even after payments are made on a timely basis that the lender will let you out of your commitment. There are even some cases where a borrower has died and the co-signer was still required to pay back the loan. And forget about bankruptcy; it’s nearly impossible to have student loans discharged. If you sign on the dotted line, expect to share the responsibility for that debt until it is paid in full.

Consider These Tips to Safeguard Your Credit

If you feel confident that your child (or other borrower) is responsible and you want to help by co-signing on a student loan, be sure to consider the following safeguards.

  • Make sure the student exhausts all federal financial aid options including federal student loans before considering a private student loan.
  • Encourage the student to diligently pursue scholarships and grant opportunities.
  • Only borrow what is absolutely needed. Play it safe by not taking out more than one years’ anticipated salary (borrower’s) upon graduation. For example, if you expect your child to earn $35,000 at his/her position, don’t borrow more than $35,000 in total student loans while he/she is in college.
  • Have the borrower sign an agreement that stipulates he/she will repay any missed payments and/or fees you cover over the life of the loan. This way, if you do end up in court, you may be able to recoup some or all of your losses.
  • Take charge of the student loan payments. It could be months before a student loan servicer or creditor contacts you about missed payments. By then, the damage to your credit score has already been done. Save yourself the trouble by mailing in the payments or submitting them electronically online. In some cases, lenders offer an incentive for using automatic payments.

Although I would love to help my daughter pay for her dream college, taking on a potential debt of $140,000 just doesn’t make financial sense. If she were to default on the loan, we could lose our retirement savings, home and other assets. She may be a little upset with me right now, but I’m confident that we can find another ‘dream’ school that’s a little more within our family’s budget. Saying no to your child (or a friend) is never easy, but in the end you must do what’s best for your financial security.

About Tamara Krause

Tamara is the Social Media Coordinator and a regular writer for eStudentLoan.com, ScholarshipExperts.com, and CampusDiscovery.com. She enjoys helping students prepare for college. As a mother of four, Tamara has first-hand experience with many areas of education, including special needs (autism), the International Baccalaureate program and post-secondary education. She enjoys speaking at schools and mentoring others online. In her free time, Tamara enjoys volunteering and supporting her favorite football team, the Jacksonville Jaguars.
26 Comments
  1. Darlene McLean

    As a mom, I took out a Sallie Mae student loan FOR my daughter, the loan is in my name. I have been paying on his loan since 1997 and still have 42,600 left owing. While I continue to make anywhere from $250 to $400 a month payments, my daughter no longer speaks to me. I would love to turn the loan over to her (I am 62 and she is 35 and makes more money than I do). Based on what I have read I am stuck with this until it is paid in full. So IF I ever retire that obligation will come off of any income received.

  2. isaac moore

    Since your daughter is not talking to you anywhere, i suggest you take her to court and sue for what you have paid and lost. Do this soon because once you enter retirement, you will be broke.

    Take all of your payment checks, etc to court and have your daughter summon to court where she has to be there. It will be your word against hers but if she benefited from the loan and you can show that she attend the school, then she would have to admit to owing you the money or lie on oath.

    If she was a “good” daughter who loved her mother and was a Christian, then this would not have been necessary.

  3. dee

    My husband and I co-signed a $20,000 student loan for our son in 2001. He went on to law school and between he and his wife they owe appx $265,000 in student loans. The economy fell apart before he was able to take the bar exam and after he did take it there were no entry level legal positions to be found. They didn’t tell any of the family they were so far in debt, just kept getting the payments deferred. He finally found a job but by then he had developed a drinking problem (though he had never had an alcoholic drink until his junior year in college) that caused him to lose it, threatened his marriage and almost caused him to die . He has been sober for almost a year and is working as a cashier but makes very little money and is still struggling with the massive debt. I don’t have any idea how much the loan we co-signed has grown to now but my husband also lost his job in 2008 and though he is employed now he has health issues that may keep him from working much longer. I have thought about mortgaging my home (it is paid for) to cover some medical bills and the loan we co-signed for. I would welcome any suggestions or ideas you might have. How fast does a student loan grow when payments are deferred, Is a mortgage a good idea?

    • Shawn Lindstrom

      Dee,

      Very tough situation. Thanks so much for sharing. You need to get a handle on what you are absolutely responsible for. If he has not paid the $20k loan you cosigned for, the bank has most definitely been trying to reach you. You need to get in touch with them to determine what your options may be. However, your situation is made more difficult by the unpredictability of your spouse to earn an income. My advice is to be defensive. I wouldn’t put my home at risk to pay off the student loan or even medical expenses. Since your situation is so complicated, I would definitely invest a few dollars and seek the guidance of a financial planner. A trained professional would be in the best position to assist you in this case. I hope your son finds his footing and moves on and that your husband’s health improves. Let us know if we can be of further assistance.

  4. Bob James

    I, too, co-signed for my son. He went on a payment program in March to take money out automatically. He apparently didn’t have enough in the account to make a payment in July. The money has since come out in August, September and October. Now I am being threatened with legal action. What are my options? Is there a way he can go back on the payment plan?

  5. Jude Boudreaux

    We’ve seen this happen with students whose parents co-signed on loans, as well as students who were doing fine, but then their parents were co-signers and then the parent filed for bankruptcy, putting the student loan into default. There’s no good situation here when it gets to that point. I truly believe we’ll need comprehensive bankruptcy reform in the United States again to deal with this issue. There shouldn’t be any debts that would cause one to be an indentured servant for life.

  6. Brian Cass

    I am currently struggling with the primary borrower of a student loan I cosigned for. I made the mistake of doing that for my ex-gf almost 7 years ago. She used up all of her deferments and made only one payment on her loans. For the last two years, my wife and I have been paying on the loan as the ex has come right out and told me she has no intention of paying it and I owe her. The total has reached over 10,000. I am having a hard time finding an attorney as I live in a completely different state than the ex. I need some help as this is crippling me financially, not too mention I also have to pay my own student loans which are in the neighborhood of 100,000.

    • Tamara Krause

      Dealing with an ex is never fun. Unfortunately, I fear you would be spending more money to take her to court (not to mention your time, too) than what you currently owe. I would suggest contacting the loan servicer and requesting a new repayment plan. If they don’t want to work with you, register a complaint with the Consumer Financial Protection Bureau and they may be able to lend a hand.

  7. Timothy Paul

    I to have co-signed for a friend and they can’t make the payments she is just barely able to put a roof over her and sons head, She can’t get a second job because there is no one to watch her son at night. She doesn’t even know how shes going to get Him any christmas presents. I feel really bad about this but I cannot afford to make the monthly payments. I am have all I can do to survive myself and right now I’m on a waiting list for a Liver Transplant. What can she or me do? I feel helpless and I don have a home but I owe $50.000.00 on it. Please advise ASAP ?

    Thanks !

    • Tamara Krause

      She should contact her student loan servicers immediately and work out a payment plan. If she simply stops paying, they will eventually come after you for the payments.I would also suggest that she look into work that can be done from home at night, as this would bring in more income without having to spend any money on daycare.

  8. Katie Vidovic

    My brother wants me to co-sign on his student loan. My husband and I have financially helped him before with getting into medical school. He is going to a Caribbean med school so he is having trouble getting additional loans. Additionally he recently got married and moved her out there and neither of them are working. And since his marriage his grades went from A’s and B’s to very low C’s and D’s? He expects me to sign and not have any say in anything. Since he only talks to me when he wants money and I don’t feel comfortable with signing on the loans and my husband is against it as we’ll. But I feel like a bad sister if I don’t. I’m not sure what to do since I think he might be able to finish if I don’t help.

    • Tamara Krause

      Just say no. If he is married, there is no reason his wife cannot work and help pay their expenses. Do not put your family’s financial stability at risk for fear of feeling like a bad sister. You are in no way obligated to assist him with college. If he really wants to do this, he’ll find a way to make it work on his own.

  9. Ed Baci

    Back in 2003 I co-signed a loan for my son. He attended one semester of college and couldn’t handle going to school. He came back home and started working and has a decent paying job. Now he is 30 years old, he was married last year (to a horrible person) and they had a baby earlier this year. There is so many personal problems with them. All we wanted was communication with our son; but our daughter-in-law doesn’t want us in their lives. They have harassment charges against us and might seek a restraining order. We didn’t do anything wrong. We tried to help them prior to their wedding. All our son wanted was money from us. Now, we are very concerned if he doesn’t fulfill his loan commitment. His payments are taken out automatically from his paycheck. We think he forgot about it. If they become aware of it, they probably will not pay. I want my name taken off the loan, since he surpassed the 48 months and he has a secure job. I want to sue him for that loan because he didn’t fulfill his part. My daughter-in-law is vicious and will resort to those nasty things. Plus, my name is on a loan for her engagement ring. Again, my son probably doesn’t remember. He does have some student loans in his name and has been paying. I want to know the legal terms on this.

    • Tamara Krause

      My suggestion is that you seek out an attorney to advise you of your rights regarding the loan on the ring. As far as the student loan goes, it’s not a guarantee that you can have your named removed as a cosigner, but now would be the time to contact the lender and inquire about the process. The loan must be in good standing and you typically have to file some paperwork before they will take you off the loan. Keep in mind that they will probably notify your son about the request since he is also on the loan.

  10. Andy

    Hello, I am the primary borrower for my daughter’s student loan and she is the co-signer. She is no longer a dependent. Based on my income I cannot qualify for the student loan deduction although I pay it every month. It is not a financial burden for me but it would be for her as she has difficulties making ends meet with her job. Is she able to take the student loan deduction on her tax return even though she doesn’t make the monthly payments? It would be help her out significantly if she could. I cannot because I am over-income and the student loan was for her educational expenses, not mine; but I am the primary borrower and she is the co-signer.

  11. moya jackson

    I cosigned with a friend of mine to get a student loan from sallie mae. he died do i have to continue making payments on this loan>?

  12. Mike

    I have cosigned for my youngest son on his students loans, as I have done for his brother and sisters. Things have gone fine with the elder siblings but youngest son started to falls apart in college, didn’t finish and has been seeing a psychiatrist. Total cosigned debt about $80,000. Now I am on social security, a small pension and a part time job. I have worked with him to register with SUNY Empire State that offers online courses so that he can at least get a BA. He will have to pay this tuition. But if he can’t complete these loans all come due and he hasn’t held a job. What options do I have?

    • Tamara Krause

      Once you cosign a loan, you are equally obligated to pay it back. I suggest contacting the loan servicer and asking about a loan modification to lower your payments.

  13. Dar Saarheim

    My second husband has been paying his son’s student loan for 10 years. His son is 36 years old and has a good job but say’s be can’t afford the $500.00 a month payment. The loan was originally $30,000 but is now $56,000 because my husband can’t afford it either. My husband co-signed for this loan before we were married. I’m I responsible for this loan if something were to happen to my husband?

    • Tamara Krause

      Unlike other debt, you would not be responsible for your husband’s student loan debt. In the case of his death, the loan servicer would more than likely have the right to try and collect the remaining balance from his estate, but you would not be required to make the monthly payments. His son would also still be on the hook for any remaining balance.

    • Tamara Krause

      Anyone can file for bankruptcy, but that doesn’t guarantee that you will no longer be obligated to pay your student loan.

  14. Veronica Starks

    I am a disabled veteran who is a cosigner on my daughters Private student loan with Navient. For the past 4 years I faithfully made the payments. Unfortunately in May 2014, I was diagnosed with breast cancer. Due to the vast treatments, surgery and after treatments I have been unable to make the loan payments and Navient will not hold my daughter accountable for her loan. I have gotten the threat calls and letters wanting me to enter another payment arrangement, which I am unable to abide by or be subjected to wage garnishments. How do I encourage Navient to also hold her accountable for her debt?

    • Tamara Krause

      Hi Veronica. In most cases, the student loan servicer will pursue whichever party it feels will be most likely to pay. If you cannot get your daughter to step up and take responsibility for the payments, and Navient is unwilling to work with you, it may be time to contact the Consumer Financial Protection Bureau and ask for some assistance in this matter. You can file a complaint here: https://help.consumerfinance.gov/app/studentloan/ask.