One of the most frequent reader questions that I receive looks something like this:
Please help! I cosigned a student loan for my child/grandchild/friend, and they are not making payments. The lender keeps calling me. What can I do?
In some cases the primary borrower cannot afford the payments. In other cases, the primary borrower may be able to make the payments but has chosen not to do so. Regardless of the reasons behind the borrower’s failure to pay, lenders will expect cosigners to pay the bill.
The bad news for cosigners stuck in this situation is that there are no easy ways to fix things. The good news is that there are several different strategies that have the potential to work.
Today we will look at these strategies to help cosigners.
Cosigner Release Programs
The obvious and permanent solution is for the cosigner to get released from the loan. If a lender releases the cosigner, all responsibility for the debt is wiped away.
Unsurprisingly, lenders don’t like granting a cosigner release. Many lenders require borrowers to make years worth of timely payments before they are even allowed to apply for a release. When the borrower applies to have their cosigner released, they must independently pass a credit check. Lenders tend to be very strict on this credit check and look for any possible excuse to deny the cosigner release.
Fortunately, there is a workaround that can help many cosigners. If the borrower refinances their student loans with a new company, the cosigned loan can be eliminated. This process isn’t technically a cosigner release, but in most cases, it is the easiest way to get a cosigner removed from a student loan.
Help the Borrower Get Their Finances in Order
For some people, managing money comes easy. For others, managing finances represents a major challenge.
It is fairly common for borrowers in the early stages of repayment to miss a deadline. Some student loan companies are notorious for making automated payments difficult. Other times, a simple error connecting bank accounts can be the source of a missed payment.
Along the same lines, many borrowers miss payments because they didn’t realize they had a bill due. Student loans typically come with a six-month “grace period” before the first payment is due. A borrower who has had their contact information change after college may have had a loan slip through the cracks.
Many of these mistakes can be infuriating from the perspective of the cosigner. Fortunately, most can be quickly resolved, before things get ugly for the borrower or the cosigner.
Things get more complicated for borrowers who are financially struggling and cannot afford to pay their bills.
Regardless of the circumstances surrounding a missed payment, some guidance from a cosigner can be very helpful. Cosigners can share strategies to make sure bills don’t get overlooked, and cosigners can help borrowers get their budget in order. The experience shared by a parent or grandparent may be the only thing the borrower needs.
In more extreme cases, the cosigner may also lend some money to the borrower to make sure the payment doesn’t get missed.
The key from the cosigner perspective is to have an open line of communication and to work with the borrower. The enemy in this situation should be the student loan(s). If the borrower and cosigner are at odds, things can get very ugly for all parties involved.
Should I Hire an Attorney or Consider a Lawsuit?
Sadly, things can get messy between a borrower and a cosigner.
The legal system may provide some remedies to cosigners, but the odds are often slim.
By contract, both the borrower and cosigner are legally responsible for the debt to be repaid to the lender. Regardless of what was discussed between the borrower and the cosigner, the lender has a right to attempt to collect the debt from the cosigner if the borrower fails to pay.
The cosigner may choose to hire a lawyer to sue the borrower, but the result could be a hollow victory. A court could require a borrower to repay the cosigner or order them to make payments on the loan, but if the borrower has no money, the cosigner is still stuck in the same position. A cosigner winning a lawsuit against the borrower won’t change the contract between the cosigner and the student loan company.
Contract laws vary from state to state, so those in dire situations may benefit from talking to a local attorney. Unfortunately, most cosigners will find the legal system isn’t as helpful as they might hope.
Investigating Debt Settlements
When borrowers fall behind on their debt, settlement may make sense to the borrower and the lender. The borrower is able to make the debt go away for a fraction of the full debt, while the lender avoids being left emptyhanded.
Sadly, the rules pertaining to student loan debt make settlements more difficult. With a personal loan or a credit card, banks and lenders worry that the borrower may go bankrupt which could wipe away the debt. In the world of student loans, erasing debt through bankruptcy is far more difficult. As a result, lenders are less concerned about getting nothing.
When a cosigner is added to the equation, a settlement becomes an even larger challenge. The lender knows they have two people on the hook for the debt. This will make them less inclined to accept partial payment.
Those who have extenuating circumstances or debt that has been delinquent for a while may have better luck, but in most cases student loan settlement is difficult.
Options for Loan Modifications
Some lenders will modify loan terms in order to help the borrower stay current on their payments. The bigger the hardship faced by the borrower, the more likely a lender will be to offer a lower interest rate or monthly payment.
When there is a cosigner in the picture, the lender will normally want to know that both the cosigner and the borrower cannot afford to make the payments.
If the cosigner isn’t in a difficult circumstance, the loan can still be modified, but it will require working with a new lender. Here again, student loan refinancing is an option. Borrowers facing financial hardship will struggle to refinance their student loans on their own. However, with a cosigner, they may get approved.
In this circumstance, a new cosigner can be substituted, or the current cosigner can cosign a new loan. The advantage to the cosigner is that the refinanced loan may have lower monthly payments that the borrower can afford. Once the borrower gets on their feet again, the loan can be refinanced yet again, ideally without the cosigner.
Borrowers and cosigners should educate themselves on the refinance process and the many lender options available. Ideally, the borrower should try to refinance on their own, but if they are denied, the cosigner can help the borrower by cosigning a new loan with better terms. A long-term loan, such as a 20-year loan, can result in dramatically reduced payments for the borrower and prevent the cosigner from having to provide any monetary assistance.
Final Thought: Don’t Lose Sight of the Big Picture
Cosigned loans normally exist between a parent and a child or other close relationship.
Money issues can be devastating to all involved.
Even though addressing issues on a student loan can be a major challenge, there is a workable solution in most circumstances. The key is to be open and to work together to find the best option.