Are Cosigners Responsible for Student Loans?
Learn the full scope of financial responsibility when cosigning student loans, including risks and potential options for release.
Cosigners help secure student loans, particularly private ones, when the primary borrower lacks sufficient credit history. A cosigner agrees to share the legal obligation of repaying a student loan alongside the student. If the primary borrower fails to make payments, the cosigner becomes responsible for the outstanding debt. Cosigners are legally bound to the student loan, assuming the same repayment duties as the student.
Understanding Cosigner Liability
When cosigning a student loan, an individual becomes “jointly and severally liable” for the debt. This legal structure means that the lender can pursue either the primary borrower or the cosigner, or both, for the entire amount owed, not just a portion. This responsibility commences immediately upon the loan’s approval and disbursement. The student loan appears on the cosigner’s credit report as their own debt, which can influence their debt-to-income ratio.
The initial application involves a “hard credit pull” on the cosigner’s credit report, which can cause a temporary decrease in their credit score. Beyond the initial inquiry, the ongoing presence of the loan impacts the cosigner’s overall credit profile. This increased debt burden may affect their ability to qualify for other forms of credit, such as mortgages or car loans, as lenders will consider this existing obligation. The cosigner’s financial standing remains tied to the loan until it is fully repaid or they are formally released, regardless of the primary borrower’s payment behavior.
Actions Taken by Lenders for Non-Payment
If the primary borrower fails to make timely student loan payments, lenders will initiate actions involving the cosigner. Lenders will contact the cosigner to demand payment, as they are equally responsible. Missed or late payments are reported to credit bureaus, negatively impacting the credit scores of both the primary borrower and the cosigner. This negative mark can remain on credit reports for up to seven years.
If payments remain delinquent, lenders intensify collection activities, including communication with third-party collection agencies. Ultimately, lenders may pursue legal action to recover the debt. This could involve filing a lawsuit against both the primary borrower and the cosigner. If a judgment is obtained, lenders can seek remedies like wage garnishment, withholding a portion of the cosigner’s earnings. For private student loans, a court order is required for wage garnishment, with amounts up to 25% of disposable income. Additionally, lenders may pursue a bank account levy, freezing funds in the cosigner’s bank account to satisfy the debt.
Cosigner Options and Release
Cosigners can explore options if the primary borrower struggles with payments or if they wish to be released from their loan. Open communication with the lender helps understand available options. Depending on loan type and lender policies, temporary relief options like deferment or forbearance may be available to pause or reduce payments. While interest accrues during forbearance, these options provide breathing room.
One way for a cosigner to be released is through refinancing the student loan. If the primary borrower has established a strong credit history and sufficient income, they may qualify to refinance the loan solely in their name, thereby removing the cosigner from the new loan agreement. This process effectively creates a new loan with new terms, and if the borrower qualifies independently, the cosigner is no longer bound to the debt.
Some lenders also offer specific cosigner release programs, allowing the cosigner to be removed from the loan after certain conditions are met. These conditions include the primary borrower making a specified number of consecutive, on-time payments, often ranging from 12 to 48 months. The borrower must also meet specific credit and income criteria, demonstrating their ability to manage the loan independently without the cosigner’s support. These options are not universally guaranteed and depend on the specific loan terms and the primary borrower’s financial standing.