The only thing worse than being buried in your own student loan debt is being buried by someone else’s student loan debt. Unfortunately, it is a common scenario.
Whether you are considering co-signing for a child, a family member, or someone else, think twice before agreeing to pay someone else’s debt.
Co-signing generally means joint responsibility
If you co-sign a student loan, you may be just as responsible as the primary borrower. If the primary borrower stops paying, or never pays, the lender can pursue you for the full amount.
In general, it does not matter if the primary borrower is paying or not–if you co-signed, you are just as responsible. If the creditor cannot find, or cannot collect from the primary borrower, they will usually pursue the co-signer. In other words, if the creditor thinks it can recover money from you, they will pursue you.
The bottom line is that if you agreed to co-sign, you are generally just as liable.
It is difficult to prove a co-signer is not liable
Most student loans are very clear and explicit on the signature pages—they usually say something like “IF YOU ARE CO-SIGNING THIS LOAN YOU ARE ALSO OBLIGATED TO REPAY THE ENTIRE AMOUNT.”
It would be very difficult to prove that a co-signer did not understand what that meant. Or in the alternative, a co-signer is unlikely to get much sympathy if they claimed “I didn’t read the contract.”
If there was an element of fraud, that changes things. For example, if a consumer could prove identity theft, or that they never actually signed the document. Those would potentially be very strong defenses.
Check the contract & terms and conditions for a potential buyout option
Bad news: you co-signed a student loan. Good news: you may not be totally screwed.
Some student loans contain a provision that explicitly allow a co-signer to be removed from a loan. It usually says something like “if the borrower makes 24 on-time payments once the loan is due and payable, the borrower may request that the co-signer is released from the loan.” For example, Sallie Mae has information on their co-signer release policy on their website. And you can review this article for more information on various co-signer release policies.
If you are a co-signer on a loan, or if you are considering co-signing on a loan, pay very close attention for that term. It could be your best way to solve the issue. And once a borrower fails to make initial payments, a creditor is not obligated to honor that provision. They may still agree to do so, but they are not under a contractual obligation to do so.
Federal loans usually do not require a co-signer
The majority of federal student loans do not require a co-signer.
That said, it can potentially be easier to get released from liability, simply because of more discharge options for federal loans. For example, if you co-sign a federal loan and the borrower dies, the loan is discharged. If the borrower becomes permanently disabled, the borrower can apply for discharge of the loan.
Contrast that with private loans—if the primary borrower dies or becomes disabled, you may still be on the hook for the loan.
Talk to an attorney and/or the lender for other options
Absent fraud, or an express contractual right to remove a co-signer, the options may be limited. That said, it is always worth talking to an attorney and/or the lender.
For one, an attorney may spot a different part of the terms and conditions that can help. Or they may be familiar with the creditor and know what they might accept for a co-signer buyout. If there is a potential defense (like fraud), an attorney should be able to provide more information.
The lender, creditor, or debt collector may also present options—but in many cases they will only do so when expressly asked. In other words, they won’t tell you upfront, but if you ask, they may present some options. The options may not be great, but in many situations it at least presents an alternative to paying the entire balance.