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I Cosigned a Student Loan and the Borrower Isn’t Making Payments

If the primary borrower isn’t making payments on a student loan, cosigners have several options to address the situation.

Written By: Michael P. Lux, Esq.

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I often receive questions from readers who are facing difficulties with student loans they’ve cosigned. A typical message goes 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?

Sometimes the primary borrower might be struggling financially and genuinely unable to afford the payments. Other times, they might have the means to pay but choose not to. Regardless of the situation, the lender will hold the cosigner responsible for the payments.

Unfortunately for cosigners caught in this predicament, there are no simple solutions. However, there are some strategies that may help resolve the issue.

Today, we’ll explore these strategies to assist cosigners in managing or resolving their obligations.

Cosigner Release Programs

Securing a release from the loan is the most straightforward and definitive solution for a cosigner. By granting a cosigner release, the lender is agreeing to completely remove the cosigner’s responsibility for the debt.

Unsurprisingly, lenders don’t like granting a cosigner release. Lenders often require that the primary borrower demonstrate a history of consistent, on-time payments over several years before they will even consider a release application. 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.

Thankfully, there is a practical alternative that can benefit many cosigners. If the primary borrower refinances their student loans with a new lender, the original cosigned loan is paid off as part of the refinance process. While this isn’t technically a cosigner release, it effectively removes the cosigner from the loan. This method often proves to be the easiest way to free a cosigner from their obligations associated with the original student loan.

Help the Borrower Get Their Finances in Order

For some people, managing money comes easy. For others, it presents major challenges.

It is fairly common for borrowers in the early stages of repayment to miss a payment deadline. Sometimes this is due to difficulties setting up automated payments — a common issue with some student loan providers. Other times, a simple error connecting bank accounts can be the source of a missed payment.

Additionally, many borrowers miss payments because they were unaware a payment was due. Student loans typically come with a six-month “grace period” after graduation before the first payment is due. A borrower whose contact information changed after college could easily miss a loan statement.

From the cosigner’s perspective, many of these mistakes can be frustrating. Fortunately, most are quickly resolvable before any serious issues develop for either the borrower or the cosigner.

The situation becomes more complex when borrowers are financially struggling and genuinely cannot afford their payments. In such cases, guidance from a cosigner can be invaluable. Cosigners can provide practical advice on keeping track of bills and managing budgets. Oftentimes, wisdom and experience shared by a parent or grandparent may be all a young borrower needs to head in the right direction.

In more extreme situations, cosigners might even consider lending money to help ensure the borrower doesn’t miss a payment.

Maintaining open communication and collaboration with the borrower is crucial. The enemy in this situation should be the student loans. If the borrower and cosigner are at odds, the situation can become detrimental for all parties involved.

Should I Hire an Attorney or Consider a Lawsuit?

Unfortunately, relationships between borrowers and cosigners can become strained, particularly when financial difficulties arise. The legal system may provide some remedies to cosigners, but the odds are often slim.

Legally, both the borrower and the cosigner are bound by contract to repay the debt owed to the lender. It’s important to understand that, regardless of any personal agreements or discussions between the borrower and cosigner, the lender is legally entitled to seek repayment from the cosigner if the borrower fails to make payments.

In situations where the borrower is not fulfilling their payment obligations, a cosigner could take legal action by suing the borrower. However, this approach can often lead to unsatisfactory outcomes. A court could mandate that the borrower must repay the cosigner or order the borrower to continue making loan payments. However, if the borrower lacks the financial resources, the cosigner may still find themselves responsible for the debt. Winning a legal battle against the borrower does not alter the agreement the cosigner has with the student loan company. Furthermore, it doesn’t guarantee that the borrower will reimburse the cosigner.

Laws regarding contracts can vary significantly between states, so cosigners facing severe issues might benefit from consulting with a local attorney to explore their legal options. Unfortunately, the legal system may not always provide a practical or favorable solution for cosigners, and navigating these waters can be challenging and often frustrating.

Investigating Debt Settlements

When borrowers fall behind on a debt, settlement can be an attractive option. Settlement allows the borrower to clear the debt for less than what they owe. This provides the borrower with some relief while allowing the lender to avoid a total loss by receiving some payment.

However, settling student loan debt is notably more challenging than settling other types of debt, such as personal loans or credit cards. With general consumer debt, lenders fear that the borrower may declare bankruptcy, which could completely clear the debt. In contrast, erasing student loan debt through bankruptcy is exceptionally difficult. This makes lenders less fearful of losing the entire amount owed. Thus, they are generally less willing to negotiate and accept a reduced payment.

The presence of a cosigner complicates the situation further. Since a cosigner provides an additional guarantee on the debt, lenders know they have another potential source of repayment. Knowing they can pursue the cosigner for full repayment if the primary borrower cannot pay reduces their incentive to accept a settlement.

Settlement opportunities might be slightly more feasible in situations where the debt has been delinquent for an extended period or if there are extenuating circumstances that affect the borrower’s or cosigner’s ability to pay. However, in most cases, achieving a settlement on student loan debt remains a tough endeavor. Those considering this route may need to consult with a financial advisor or attorney to explore their options and understand the potential impacts on their financial situation and credit.

Options for Loan Modifications

Lenders sometimes adjust loan terms in order to help the borrower stay current on their payments. The greater the hardship faced by the borrower, the more likely a lender will be to offer a lower interest rate or monthly payment.

When a loan has a cosigner, the lender typically examines the financial situations of both the primary borrower and the cosigner before agreeing to modify the loan terms. If the cosigner is not experiencing financial difficulties, the lender may be less inclined to alter the loan terms, assuming that the cosigner can continue making payments.

If loan modification isn’t feasible with the current lender due to the cosigner’s stable financial situation, refinancing the loan with a new lender might be an option. For borrowers experiencing hardship, securing refinancing on their own can be challenging. However, having a cosigner with a good credit history and stable income can increase the likelihood of approval for refinancing. This can lead to potentially better loan terms, such as lower interest rates and monthly payments that are more manageable for the borrower.

In this circumstance, a new cosigner can replace the existing one, or the current cosigner can agree to cosign the refinanced loan. This can be advantageous as the new loan may have terms that allow the borrower to more easily manage the payments. Once the borrower’s financial situation improves, there may be an opportunity to refinance the loan again, this time ideally without a cosigner. This step would release the cosigner from any obligations, assuming the borrower can qualify for refinancing based on their own financial merit.

Both borrowers and cosigners should familiarize themselves with the refinancing process and compare different lender options. While the ideal scenario involves the borrower refinancing independently, having a cosigner step in to help secure better loan terms can be a practical interim solution. Opting for a longer-term loan, such as a 20-year term, can significantly reduce monthly payments, which may prevent the need for the cosigner to provide direct financial support.

This approach not only helps the borrower manage their debt more effectively but also protects the cosigner’s interests by potentially reducing their involvement over time.

Final Thought: Don’t Lose Sight of the Big Picture

Cosigned loans often involve close relationships, such as between parents and children, where financial strains can heavily impact personal connections.

Despite the challenges that can arise with managing student loans, most situations have viable solutions. The key to navigating these issues successfully is open communication. Both parties— the borrower and the cosigner—need to collaborate closely to explore all available options. By working together and maintaining transparency about financial realities and capabilities, it’s possible to find strategies that mitigate the burden of the loan.

Effective cooperation might involve restructuring the loan, seeking refinancing options, or exploring deferment or forbearance if temporary financial hardships occur. Additionally, it’s crucial for both parties to stay informed about the terms of the loan and any changes in the financial landscape that could affect their obligations.

By jointly tackling the challenges, maintaining open lines of communication, and regularly reviewing financial strategies, borrowers and cosigners can manage the loan more effectively and preserve their relationship.

About the Author

Student loan expert Michael Lux is a licensed attorney and the founder of The Student Loan Sherpa. He has helped borrowers navigate life with student debt since 2013.

Insight from Michael has been featured in US News & World Report, Forbes, The Wall Street Journal, and numerous other online and print publications.

Michael is available for speaking engagements and to respond to press inquiries.

6 thoughts on “I Cosigned a Student Loan and the Borrower Isn’t Making Payments”

  1. I co-signed a student loan and the primary on the loan will not/cannot pay. I haven’t spoken to her in 10+ years. Her father sent me a message stating he will cover her student loans but now will not. Would I win a suit with his statement?

    Reply
    • Just saying that you are going to do something isn’t enough to create a legal obligation to do so. However, other circumstances when added to that statement could potentially create a legal obligation.

      That all said, this is a question best directed to a local attorney familiar with the laws of your state.

      It sucks that you are in this situation after trying to help someone go to school, and I wish you the best of luck.

      Reply
  2. Is there anything a truly struggling individual can do to deal with a high-balance, private student loan that’s been cosigned by a twice-bankrupt mother and a deceased grandmother? Refinancing is basically impossible due to unfavorable DTI.

    Reply
    • There isn’t any one thing that usually works. However, there are several items that occasionally work.

      Especially right now, private lenders are making efforts to accommodate borrowers struggling financially. Calling your lender and asking for help may work. Just be sure you are getting actual help. A deferment or forbearance just delays your problem by a couple months. Try to come up with a plan that works long term… aka one that gives you a meaningful path to eliminating your debt.

      Sometimes filing a complaint against a lender or reaching out to the company’s ombudsman will make a difference. For example, if you have navient or sallie mae, this article might help. More generally, this article can also help.

      Just remember that the complaint process is more likely to go well for you if you make reasonable requests to your lender and the refuse to accommodate. If you ask for 0% interest, you are not being reasonable. If you ask for an interest rate reduction so that you can start making progress on your loan, it is a more reasonable request. When you file the complaint, be sure to note the help you asked for and what the lender was willing to do.

      Reply
  3. I have a student loan FFELP through Nelnet for over $40,000 since 2005. I qualify for the Teacher loan forgiveness and the PSFL. My payments are $225/month interest rate of 3.88%. Would it be beneficial for me to consolidate in order to qualify to apply for the 2 forgiveness loans? I can’t afford a higher monthly payment.

    Reply

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