Cosigner's Responsibility on an Unpaid Student Loan
Co-signing for any loan involves a serious legal undertaking. That's because co-signers are not just vouching for the borrower's ability to repay the debt, but promising to step into the shoes of a borrower who fails to meet their loan obligations.
A co-signer should be aware that if a creditor has attempted to collect from the student and failed, the late fees and collection costs are passed on to them, in addition to the original debt amount. Also, a defaulted student loan may affect the co-signer’s credit rating, even though being a co-signer will not help a credit score. Finally, in some states, lenders may have the right to come after a co-signer for repayment if a loan goes into default, without even trying to first collect from the student.
The ideal way for a co-signer to be released from a loan is for the student to successfully repay the loan, which in turn relieves the co-signer from any further responsibility. However, there are two unusual situations in which a co-signer may be able to be released from a repayment obligation on a student loan: bankruptcy or cancellation of the loan itself.
Student Loans & Bankruptcy
As a general rule, student loans are not dischargeable in bankruptcy.Under rare circumstances, however, if the borrower can prove that attempts to repay the loan would present a severe hardship, some courts allow discharge. Courts will consider several factors in making this hardship determination. They include, but are not limited to, the following:
- Your income and expenses;
- How long your financial problems will (or are likely) to continue;
- Past and/or current efforts made to try and repay the debt.
To claim a hardship discharge, you must file a separate court action in your bankruptcy proceeding supporting your discharge request. You'll probably need an attorney to help you with the procedure. Bottom line: student loan discharges are a very difficult standard to meet.
Canceling a Student Loan
In certain limited circumstances, the student may be able to cancel their student loan, which in turn relieves you, the co-signer, of your obligation to re-pay. Part of the obstacle for a co-signer is that so much of the responsibility for cancellation rests with the student debtor. Certain conditions will have to be met depending on the type of loan involved. In some situations, the student won’t be able to cancel the entire loan, but may be able to eliminate a portion of the loan. Severe economic hardship that did not exist at the time of the loan or some type of intervening disability may qualify.
Contact the Department of Education's Ombudsman at 877-557-2575.
Deferment & Forbearance Options
If neither of the above two options is available, a student may be able to postpone making their payments through a deferment or a forbearance program. Through each of these programs, a loan holder may give permission (i.e., excuse) to a student to exempt them from having to make payments for a certain period of time. For a deferment or forbearance to be granted certain conditions must be met (e.g., hardship, returning to school, unemployment). Although forbearance is typically easier to obtain than a deferment, it is used for short periods of time. Co-signers may urge a student to contact the loan holder and request the appropriate form, prepared to document reasons that they think qualifies them for the deferment or forbearance. If this is granted, then a co-signer would not have to cover payments during this period. Once the student is able, they can be once again start to make the payments themselves.
Know Your Legal Rights as a Co-signer
Co-signers should know their own legal rights. They should learn in advance, what these rights and obligations are. A frank discussion with the student should be an on-going part of signing “on the dotted line,” as well as managing the debt afterwards.