What to do When the Primary Signer Defaults on a Student Loan

Agreeing to be a cosigner for a student loan is a huge responsibility. Hopefully, if you have already cosigned for a loan you did it with someone you trust. Open communication is crucial when agreeing to cosign for a loan. However, sometimes payments don’t get made and as the cosigner, you may not know what’s happening until it’s too late and you are dealing with a loan default.

The Road to Loan Default

First, let’s talk about what it means to default on a student loan. When the primary signer misses a payment, the loan is considered delinquent. During the delinquency it’s crucial to keep communicating with your lender. If help is sought in the early stages of delinquency there may be options such as deferment or forbearance to assist borrowers. However, if payments continue to be missed and the delinquency goes on for many weeks the loan defaults.

Repercussions of a Defaulted Loan

Once a loan has defaulted, borrowers will be immediately responsible for the entire amount of the loan including all accrued interest. A defaulted loan is no longer eligible for deferment, forbearance, or repayment plans. The loan will be shifted to a collections agency and the default will be noted on the borrowers’ credit scores. Collection agencies will then use other means to recoup the money including garnishing wages, repossessing vehicles, and even putting a lien on your home. Because students typically don’t have as many assets as the cosigner, it’s more likely that you as the cosigner will feel the impact.

Communicate With the Primary Signer

Now that you know what happens when a student loan defaults, talking to the primary signer is critical. Discuss what the defaulted loan means for you and them. Remind them of their responsibility. Together, create a plan for how you will pay off the loan in full.

Consider Your Options

There’s no easy way of dealing with a defaulted loan. Most of the simple solutions happen long before a loan has even become delinquent. Nevertheless, let’s talk about a few options for you to consider.

• Contact the lender – It’s unlikely that the lender will be able to provide many options once the loan has defaulted, but it’s still worth contacting them to see if they can do anything to help. At HESAA, we have resources for those that are having trouble making payments on our supplemental loans.
• Primary signer takes out a third party loan – While the chances of them finding a lender are slim, the primary signer may be able to take out a third party loan large enough to pay off the student loan (remember that once a student loan is defaulted borrowers owe the entire amount of the loan plus interest immediately). This would completely absolve you of any further responsibility for the student loan.
• You take out a third party loan – If the primary signer does not qualify or is unwilling to take out a third party loan, this may be your best option if you don’t have the savings to pay the full amount of the student loan upfront. A third party loan is likely to have a high interest rate but would allow you to make payments.
• Contact friends and family – See if any friends and family would be willing to make a financial contribution to help pay off the student loan. If enough people help out it could make the amount you have to pay attainable without needing a third party loan.
• Talk with a financial planner – A financial planner won’t make the student loan responsibility go away but he/she may be able to help you find the best way to pay off the loan and to start the process of getting your credit score and personal finances back to where they need to be.

Hopefully, as a cosigner you understood that there was the possibility that you would be responsible for either partially or entirely paying off this loan, and as such you have sufficient funds in place to do so. If not, we hope that this article will help you consider what other options are available to you.

How Cosigning a Student Loan Works

Between rising tuition costs and higher prices on everything from housing to books, many — if not most — college students find that student loans are their last hope for acquiring a higher education. Those students who find that borrowing money is necessary, even after College Savings Plans, Grants, and Scholarships, should look into ways to Minimize Their Student Loan Debt.

Additionally, if student loans are necessary, Federal Student Loans should be used as the student’s primary borrowing source. Federally backed loans typically don’t require a cosigner and provide additional benefits like lower interest rates, payment deferral while in school, tax deductible interest, and the possibility of deferral or forbearance during repayment.

Private and Supplemental Student Loans Often Require a Cosigner

There are times, however, when college savings, scholarships, grants, and federal loans just aren’t enough. Under these circumstances, students and their families can begin looking at private & supplemental loans like New Jersey College Loans to Assist State Students (NJCLASS) available through HESAA.

Because most college students either don’t have a good credit score or don’t have an established credit history, many private and supplemental lenders require a cosigner on student loans, but Cosigning a Student Loan Can Be Risky. Understanding how cosigning works is critical in this situation.

Why Is a Cosigner Needed?

Private and supplemental student loans are termed as unsecured consumer loans. That means that they are not backed by the government and they aren’t secured by a tangible asset like a house or a car, making them riskier investments because there is nothing to repossess if the loan defaults. When a student doesn’t have a good credit score or an established credit history, financial institutions will also see them as a risky investment because there isn’t any historic data indicating that this person is likely to pay back the loan. This typically results either in high interest rates, low borrowing limits, or both. It can even result in being turned down for a loan altogether.

However, many lenders will consider extending a loan with better terms if somebody is willing to cosign the loan with the primary borrower. The credit score and history of the cosigner will be taken into account and allow the lender to offer better interest rates, borrowing limits, and loan terms. While most student loan cosigners are the student’s parents, a cosigner doesn’t have to be related to the borrower.

What Does Cosigning Mean?

A cosigner — as the name indicates — signs the loan in tandem with the primary borrower. In essence, they guarantee that they will cover the debt if the primary borrower fails to pay back the borrowed money. Even though they don’t receive any money from the loan, the cosigner takes on equal responsibility for repaying the debt.

It’s important to note that any cosigned loans will show on the cosigner’s credit rating and credit history, and any late payments on those loans can and will affect their ability to borrow money themselves. If the primary borrower fails to make payments or defaults on the loan, the cosigner can be held responsible for repayment of the debt.

Cosigning a Student Loan Is a Big Responsibility

In many ways, cosigning a loan isn’t that different from taking out a loan yourself. Until the loan is paid back, you are financially responsible for its repayment. Before agreeing to cosign a student loan, you should carefully consider how doing so will affect you and your credit. You will need to be sure that you are willing and able to repay the loan if the primary borrower fails to make payments on the loan for any reason.

If you choose to cosign a student loan, you should carefully consider all aspects of the loan including the loan’s interest rate, term, repayment schedule, and penalties. Then, you should make sure that the primary borrower fully understands the risk you are taking on for them and how their action or inaction can and will affect your financial position.

What Are the Risks of Cosigning a Student Loan?

With rising college costs, it is critical that you understand the different types of financial aid available to the families of students who wish to pursue higher education. College Savings Plans, Scholarships and Grants are typically the best sources of money to pay for college, but aren’t always enough. When college costs outstrip available funds and financial aid that does not require repayment, student loans are generally used to make up the difference. If you find that student loans are necessary to fulfilling your student’s higher education goals, you should begin by looking at ways to Minimize Student Loan Debt.

Federal Student Loans

If borrowing money becomes necessary, Federal Student Loans — both subsidized and unsubsidized — should be pursued as the primary loan source. These loans are entered into by the student and do not require a cosigner. Additional benefits of these loans typically include:

• Lower Interest Rates
• Repayment Deferral While the Student Is in School
• Interest Payments Are Tax Deductible in Some Cases
• There Are Options for Deferral or Forbearance During Repayment When Necessary

Private and Supplemental Student Loans

If savings, scholarships, grants, and Federal loans still aren’t enough, you can begin looking at private and supplemental loan options. Private loans are available through many financial institutions and some states offer supplemental loans like the New Jersey College Loans to Assist State Students (NJCLASS) available through the Higher Education Student Assistance Authority (HESAA). It’s important to note, however, that most of these types of loans require the student to have a cosigner.

Cosigning a Student Loan Is Risky

A cosigner’s established credit history often results in higher borrowing limits and lower interest rates, but cosigning isn’t without its risks. To begin with, when a student loan requires a cosigner, both the student and the cosigner are listed as borrowers on the loan, meaning that they are both responsible for the repayment of the loan.

As a cosigner, the risks you take on with a private or supplemental student loan include:

• The loan and its payment record are listed on your credit history.
• You are taking on new debt, which affects your credit score.
• Any late payments on the loan reflect on your credit history and credit score.
• You are liable for repayment of the loan if the student is unable to repay the loan at any time.
• Your responsibility for the loan is equal with that of the student borrower.
• If the loan defaults, the lender can attempt to recoup the balance of the loan from you.
• Financial institutions are not obligated to keep you up to date on the loan’s status.

It’s important to remember that cosigning a student loan is essentially the same as taking out a loan in your own name. Careful evaluation of the loan’s interest rates, terms, penalties, and repayment schedule is a critical action that should be part of the borrowing process.
If you choose to cosign a student loan, you should have a serious discussion with your student regarding the financial obligation that you are both taking on. Make sure that they understand that their actions or inaction can reflect on your financial position as well as their own.