Should You Co-Sign on Someone's Student Loans?Author: Jeff Mictabor
February 21, 2011 Anyone who has first-hand experience with student loan debt will tell you that the only way to eliminate it is to pay off your student loans.
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 student loan.
Student loans are one of the hardest types of debt to shake. Current U.S. bankruptcy law allows a court to discharge student 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 student loan borrowers qualify for bankruptcy discharge under the law, the vast majority of student 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 student 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 student 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 student 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 student 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 student 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 student loan co-signer has all the same legal responsibilities as the primary student loan borrower and has a legal obligation to repay the student 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 student loans.
Unfortunately, too many co-borrowers realize this truth very late in the game.
If you've co-signed on someone's student loans and your primary borrower makes all of her or his payments on the student 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 student 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 student loan debt can also be applied to the co-signer. These legal remedies include assignment of the delinquent student 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 student 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 student 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 student 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:
- 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 student 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.
- 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 student loan may reduce your overall creditworthiness since the student loan debt will be viewed as a liability.
- If your primary borrower communicates to you that s/he is having difficulty making the monthly student loan payments, contact the lender immediately. For federal college loans, ask about your student 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.
- If your primary borrower misses a payment or stops making payments altogether, you'll be expected to take over the student 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 student loan payments until the primary borrower can resume responsibility for making the payments her or himself.
Jeff Mictabor is an enthusiast on the topic of student loan issues in the news. He has been writing for the past 10 years for a variety of education publications. He now offers his writing services on a freelance basis.