Dangerous Guarantee: A Lesson for Potential Co-Signers

Co-signing student loans is a common support mechanism within families. A prominent example is Rebecca and Sabrina Finch. In 2007, Rebecca co-signed a student loan for her daughter Sabrina. However, due to health issues, Sabrina was unable to pay her bills. The lender forgave the remaining debt upon submission of proof of disability — only to transfer the payment obligation to Rebecca. Today, at the age of 85 and facing health issues herself, Rebecca is now required to repay Sabrina’s loan. With a monthly income of only $1,650 from Social Security, she is unable to manage the remaining debt of over $31,000. Both Rebecca and Sabrina fear that the bank could foreclose on Rebecca’s home to recover the debt. Those considering co-signing a student loan for relatives should be aware of the risks. By co-signing, you assume the responsibility to repay the loan if the primary borrower defaults. According to the Education Data Initiative, an average of 8.15% of student loans are in default at any given time. Since 2011, an average of 471,000 students have defaulted annually by their second repayment year. Currently, LendingTree reports that 93.1% of private student loans and 69.2% of graduate student loans in the 2023-2024 academic year had a co-signer. While federal student loans offer protections such as deferment and forbearance, private loans largely lack this flexibility. Returning to the initial case: Rebecca’s home might not be immediately foreclosed upon since student loans are generally unsecured. However, the lender could file a lawsuit in the event of default to place a lien on the house. Despite this possibility, it is more likely that the lender would wait until the house is sold to recoup its claim from the sale proceeds. There is one reassuring detail: Social Security benefits are protected from garnishment by private student loan creditors. In contrast, federal loans can garnish benefits after default. Therefore, Rebecca’s primary source of income should be secure. Sabrina’s best hope is to release her mother from the payment obligation by demonstrating that repayment is impossible. While private student loans are difficult to discharge, a lender may relent in exceptional cases. Co-signers should nevertheless think twice before signing a loan. Sabrina submitted the discharge forms on July 26 and is currently awaiting processing.