Paying for college can be tricky when your family does not have the financial means to cover the cost. While some students may be lucky enough to get help in the form of financial aid or scholarships (like me), for many, the only realistic option is student loans. Although government loans are an option for a majority of student debt borrowers, many students must also rely on loans from private banks to cover the rest of their college tuition. Since most teenagers trying to borrow tens of thousands of dollars of student loans have no credit history, they typically must find a cosigner to get approved for these loans. These cosigners, who are usually close family members, are then attached to the debt, and are expected to pay back the loan in the event that the student is unable to do so.
Like all plans with good intentions, however, things can go wrong with cosigner arrangements. In this article, and in the ones that follow, I will delve into my own personal cosigner stories.
As the old saying goes, if something can go wrong, it will go wrong. In my opinion, there are two main problems with utilizing a cosigner for borrowing student loans: the cosigner may die, or the cosigner may declare bankruptcy. Luckily for me, both of these situations happened with my private student loan cosigners (no, not with the same person…that would just be ridiculous).
As I mentioned in previous articles, in addition to receiving significant financial aid and government loans, I also had to take out two private loans to finance the first two years of my undergraduate education. Some of my immediate family members were unable to cosign my student loans for various reasons, and so I was pretty limited with my options. I ultimately was able to get my grandmother and another relative to cosign each of the loans. At the time, I was just glad that the loans were approved, and I was not concerned with how these loans would be paid off once I finished school. With this said, I probably should have read the fine print in each loan agreement, as I subsequently ran into problems with both loans while I was in medical school and while both loans were already in repayment.
By the start of my freshman year of college, my grandmother was already in her eighties (which, incidentally, is past the national average life expectancy). That did not stop her from agreeing to cosign my $14,000 student loan. My grandmother was always selfless, and even though she could not afford to pay my educational costs (she almost exclusively relied on her social security checks to finance her retirement), she signed the student loan paperwork without batting an eye. I did not think about the loan for the rest of my college years, and when I began medical school, I started to pay back the loan through small monthly payments.
I slowly repaid the loan for about two years without any hiccups. Then, during my third year of medical school, the unthinkable (but in retrospect, somewhat predictable) happened. After a few short months of deteriorating health, my grandmother passed away. While her death definitely affected me emotionally, I did not, however, think that it would affect me financially. In fact, I continued to pay off the student loan my grandmother cosigned, with little thought about how her death would affect the loan agreement. A few months later, however, I was informed that the bank which owned the loan had filed a claim against my grandmother’s estate.
My brother Jordan, it turned out, was in a similar situation. The bank was asking that the debt be completely satisfied by proceeds from my grandmother’s estate, and this situation created much tension within my family. A beneficiary of my grandmother’s estate asked that my brother Jordan and I write a letter relating that we would pay off our student loans ourselves so that the estate was off the hook. This whole process was extremely aggravating, and eventually, my brother Jordan and I were ultimately responsible for paying off the student debt my grandmother cosigned. Fortunately for the both of us, we had been making regular monthly payments on our debt, and were in good standing with the bank that lent us these loans. The bank, realizing that it could make more money on interest with the current repayment scheme, did not accelerate our payment of the debt, and our repayment schedule was left untouched.
Things, however, could have been very different. The death of a student debt cosigner can sometimes cause the loan to ”auto-default.” This essentially makes the remaining loan balance due immediately. This default then becomes a red flag on your credit report, and if you are unable to renegotiate repayment of the loan with the lender, this situation could lower your credit score and drastically affect other aspects of your life (good luck buying a house, leasing a car, or even getting a new credit card).
While this is a worst-case scenario, there are ways to prevent issues from arising when using a cosigner to borrow student debt. First, look at the fine print of private student loan agreements and see if any of them include automatic default policies. If it is too late for that, and the cosigner has already passed, you can appeal to the lender to release the cosigner from the debt. This would depend on your current income and credit history. If, however, you still need a cosigner based on your financial situation, you can try and refinance the loan using a new bank and a new cosigner (hey, you may even be able to negotiate a lower interest rate!). Most lenders will be eager to negotiate. They would rather receive monthly payments from a responsible student debtor, than receive one lump sum that would not include any potential interest or could even be less than the initial principal (if they decide to go through a collection agency).
My experience with the death of a cosigner was thankfully less stressful than it could have been. But it did teach me to read contracts and agreements significantly more closely. In my next article, I will talk about what happens when the lender does not play ball, and what to do when your debt is referred to collections. Stay tuned!
Adam Rothman is a guest writer for Student Debt Diaries and is currently a medical professional in the New York City area. He is a brother of Jordan Rothman, the founder of Student Debt Diaries. You can reach Adam through email at adam@studentdebtdiaries.com