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Friend's Student Loans Put Co-signer in a Bind

 
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March 27, 2013
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QDear Erica,

I made a big mistake because I didn't know any better. I co-signed a friend's student loans. At the time, she was in a rough spot, and her parents had refused to help her. Anyway, she graduated this December, and she's been working only part time. She sent me an email telling me that she's not going to be able to make the next month's payment and saying she's sorry, but there's nothing she can do. Are collectors going to come after me? Do I have any options? Or is this one of those “tuition in the school of life” things, where I should just make the payments for now to keep the loan up to date? I just told my dad I co-signed, and he was furious at my stupidity and said my credit could be wrecked. There's about $15,000 on the loan. – Byron

AHi Byron,

I understand your father's reaction. As a parent, you want your offspring to make positive financial decisions. When you discover they've made major mistakes that can potentially haunt them for many years, well, that can be a little upsetting.Ask Erica

Then again, Dad needs to recognize that it's your life and, yes, making errors is an intrinsic part of growing up. So enough about him, it's you I'm concerned about.

It's true that when you co-signed on your friend's student loan, you put your financial picture in peril. You're a joint owner of the debt, and as such, the account is showing up on your consumer credit reports as well as hers. Plus, its history is being factored into both of your credit scores.

Consequently, it is important that payments go out on time. If they do not, your credit rating will decline. Evidence of a late payment will remain on your credit report for seven years, and the later it is, the worse it will be. Because payment history is the most important factor in a FICO score (the score lenders most commonly check), the impact of late payments will be significant.

Regarding collectors, they'll come after you (and your friend) only if the account goes into default and the lender sells the delinquent account to a collection agency. That can take many months of non-payment. However, as with late payments, it's crucial to prevent that from happening. The consequences for an account going into collections are nasty: Your credit reports and scores will really suffer and expensive fees will be applied. You may also be sued for the debt, and if you lose the case, you can be subject to wage garnishment and tax refund interceptions.

In a way, it was nice of your friend to give you an early warning that trouble was brewing. Now that you know, you can do something about it before the damage intensifies.

Take the initiative and call the lender. As a co-owner on the account, you have that right. It would be unusual to be let off the hook, but give it a try. If they say no, ask what they can do for you to keep the account in good standing. The loan is probably private (federally guaranteed student loans like Stafford and Perkins aren't credit contingent), so deferments and forbearances won't be available, but find out if the lender has some kind of hardship program available. If it does, you and your friend should take advantage of it, allowing you both to take a short break from payments without experiencing any credit damage.

No hardship program? You have a couple of options. One is to put the pressure on your pal to make a stronger effort to pay, and the other is to send the money in yourself. She doesn't seem too concerned about the situation, so it looks like the latter might be your best bet. Make a note of every dollar you send, and collect from her when her work situation improves. And if she reneges? Talk to an attorney about your chances of success if you were to take her to court.

Above all, let this experience be a lesson. In the future, do not co-sign for anyone. A lender doesn't accept your signature because it looks pretty, but because it's your assurance that if the other person doesn't pay, you will.

Got a question for Erica? Send her an email.


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