What Happens When a Student Loan Is Not Being Paid by the Co-signer?

Private lenders for student loans often require that borrowers apply with a co-signer. The co-signer adds security by agreeing to repay the loan if the student doesn't, so the lender extends credit as if the co-signer were the borrower. Unfortunately, in some cases, the co-signer isn't actually willing or able to pay the loan when the student fails to. This will lead to several undesirable results.

Both Held Responsible

Although the student is the one who borrowed the money, in a legal sense, the student and co-signer are equally responsible for repaying the debt. In many states, the lender does not even have to pursue the student for repayment before turning to the co-signer to request payment. Each of the results of not paying a student loan affects the student and co-signer or whomever the lender chooses to pursue for payment.

Credit Score

Student loans are reported on both the student borrower's credit report and the co-signer's credit report. Regardless of who makes the payments, the full payment history appears on both credit reports. Likewise, when neither party pays, the missed payments appear on both credit reports as well. This will lower both credit scores and make it more difficult for the student and co-signer to obtain credit in the future.

Default

When neither the student borrower nor the co-signer has made a payment in 180 days, the loan usually goes into default. This means that the original lender sells it to a collection agency, who then tries to collect the remainder of the payment. The collection agency can pursue either borrower, and often chooses the co-signer because he typically has more income and assets than the student borrower. The collection agency can sue either borrower to try to get a court judgment requiring payment from bank accounts or wages garnished from paychecks. A court judgment will appear only on the credit report of the individual who is sued.

Considerations

Co-signing a loan is dangerous because you are taking a risk that no lender was willing to take. Although it can help the student borrow money for education, the student might not be able to repay the debt a few years down the road. You should only co-sign if you are willing to suffer the financial and credit-related consequences of the student's failure to pay. If you already have co-signed and want to get out of a student loan, you have two main options. If the student is consistently making payments as scheduled, ask the lender if you can be released as the co-signer. The other option is to have the student refinance the loan with someone else as the co-signer.