One of the more devastating aspects of struggles with student debt is the tension that can be caused with a cosigner.
Every year college students across the country are unable to qualify for loans on their own, so they go to family and friends to get the loan cosigned.
Cosigning a loan means more than just vouching for someone’s ability to pay. If the borrower fails to make payments on the loan, the cosigner is on the hook.
What to do when you can’t pay…
Lenders tend to have very little mercy when it comes to loans where there is a cosigner. After all, if you can’t pay, they have another person they can go after who is legally obligated to pay the debt.
If you are afraid you cannot pay, the critical first step is to call your lender to discuss the options available. Some lenders will tell you there is no choice, while others may offer extended plans or graduated plans that can give you lower payments in the short-term. In the worst case scenario, a deferment or a forbearance could be an option, but be careful with this route, it may just make things worse.
If you have explored every option with your lender and are still unable to meet your obligations on the loan, it is time to have a difficult conversation with your cosigner. When you miss a payment or two, your cosigner will be getting a call from the lender. You really don’t want this phone call to come as a surprise.
For some cosigners, maintaining their credit score may be more important than the money in question. They may decide to immediately take over payments so that their credit is not negatively affected. A heads up phone call gives your cosigner time to explore their options and make the necessary preparations to take over payments.
Have a plan
It isn’t pleasant telling someone that you can’t pay your bills and that they are about to get a call from your creditors, but it is an essential conversation.
To make it go a little smother, have a plan or two in place to discuss.
Start by talking about the options that you explored with your lender. Outline the steps that you took to avoid getting into this situation.
Next, outline your budget. Finances are typically a more private matter, but in this case, it is the business of your cosigner. Share the costs that you cut out of your life in an attempt to stay caught up and outline your monthly budget. This shows the effort you put into avoiding the situation and creates an opportunity for you and your cosigner to discuss ways out of the situation.
Financial issues can put a strain on any relationship, so the more you can do to put your cosigner at ease, the better. If you are hunting for a job or have an idea for ways you can fix this situation, your cosigner will likely be glad to hear it.
The most common outcomes in these situations are that payments get missed and the credit of both the borrower and the cosigner takes a beating or the cosigner takes over payments. However, there are a couple long shots that are worth trying.
If the cosigner is also in a difficult financial situation, another call to your lender may be in order. For example, Navient has a rate reduction program for borrowers struggling to keep up. If you call with your financial details AND your cosigners, you might still be able to enroll. This could result in a dramatic reduction of your interest rates and might be your chance to get things under control.
If your cosigner has great credit, refinancing the loan might also be an option. There are a large number of companies offering student loan refinancing services. The way they handle cosigners varies greatly from lender to lender, so it is advisable to shop around. Your cosigner might be hesitant to sign a new loan given the problems that you already have, but a lower rate or longer repayment term could help keep the payments manageable.
Falling behind on a loan with a cosigner is a lousy situation. Efforts must be made to address the financial issues and to address the strain that can be caused in the relationship.