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.

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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.

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Case Studies: Co-signer’s Responsibility on an Unpaid Student Loan

Case Study 1: John and Sarah

John co-signed a student loan for his sister, Sarah. Unfortunately, Sarah encountered financial difficulties and was unable to repay the loan. Despite multiple attempts by the creditor to collect from Sarah, she remained unable to meet her obligations.

As a result, the late fees and collection costs were passed on to John, in addition to the original debt amount.John’s credit rating was also negatively affected, even though being a co-signer did not improve his credit score. In their state, the lender had the right to pursue John for repayment without first attempting to collect from Sarah.

Case Study 2: Lisa and Michael

Lisa co-signed a student loan for her son, Michael. Due to unforeseen circumstances, Michael filed for bankruptcy. While student loans are generally not dischargeable in bankruptcy, there are rare circumstances where the borrower can prove severe hardship and obtain a discharge.

Michael filed a separate court action within his bankruptcy proceeding, supported by Lisa, to request a hardship discharge for the student loan. This process required the assistance of an attorney and proved to be challenging. Hardship discharges for student loans have strict criteria and are difficult to obtain.

Case Study 3: Emily and David

Emily co-signed a student loan for her friend, David. David faced a severe economic hardship that did not exist at the time of the loan, and he was unable to repay the entire loan. However, certain conditions allowed David to cancel a portion of the loan, relieving Emily of her obligation to repay that portion. David had to meet specific criteria depending on the type of loan.

Case Study 4: Jessica and Brian

Jessica co-signed a student loan for her nephew, Brian. When Brian experienced financial difficulties, he explored deferment and forbearance options. Deferment and forbearance programs allow borrowers to postpone their loan payments for a certain period of time, subject to specific conditions such as hardship, returning to school, or unemployment.

Brian qualified for a forbearance program, which excused him from making payments for a short period. During this time, Jessica was not required to cover the payments. Once Brian was financially able, he resumed making the payments himself.

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