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Cosigning Student Loans - Learn From My Mistakes - Please Read

New Member

Cosigning Student Loans - Learn From My Mistakes - Please Read

I have gone through a nightmare due to a student loan that I co-signed on, and I am creating this post in the hopes that you will learn from my mistakes. Please pass this post on to anyone who you think would benefit, and hopefully save them a lot of heartache and anxiety. My post is lengthy, but please be patient and read it, it could literally save your financial life.

Briefly here is my situation: I am the co-signer on a $60K Sallie Mae private student loan where the primary borrower has defaulted on me, meaning they have told me they cannot pay a dime, have no intention of changing their lifestyle to do so, and will not tell me when, if ever, they will make good on this. Meanwhile, as the guarantor of the loan, I have been subjected to the full force of SM collection agency practices, and forced to face the music while the primary person on this loan can blissfully ignore the situation as if it was not happening. After multiple weeks of heartache, anxiety and worry over my financial future, I found in the fine print that if I make 24 consecutive on-time payments, then I am off the hook. I verified this with SM and am now 6 months into paying this off. As long as nothing unexpected occurs, I am looking forward to being off the hook in 18 months, having learned an expensive but not life altering lesson, as I was originally facing. Now let me go into some lessons, please pass these on to anyone you think would benefit - let's make this post the most widely read one on FICO forums, this is so important. And now my hard lessons learned:

Lesson #1: DO NOT COSIGN A STUDENT LOAN: especially private student loans which carry higher interest rates. When you cosign a loan, you are the guarantor: you are putting your good credit profile on the line and telling the loan agency that you are responsible if anything ever happens with the primary borrower and they are unable to pay. All the obligations are on your shoulders, in fact, in many ways you are more responsible than the primary borrower, and this is how the loan and collection agencies will treat you. If you think: that's just the fine print, that will never happen, think again. It happens all the time, are you willing and able to take on this burden if you have to? Possibilities become reality, and this is a reality you do not want to be a part of, trust me on this. If you want to help someone, find other ways to do it outside of the system. Loan them the money as an individual, or pay their rent or expenses, that way, if problems arise, you don't have to get credit agencies, loan agencies, and collections agencies involved. If you are a parent and want to help your child, see Lesson #2.

Lesson #2: LOAN ONLY WHAT YOU CAN LOSE: Every rule has exceptions, so the exception to Lesson #1 is this: only cosign on a loan if you are absolutely willing and able to pay off the full loan obligation. When you cosign you are lending your good name and credit profile, and you are effectively loaning money that you will have to pay back if the primary borrower defaults. In other words, never loan more than you are willing to lose, and therefore never cosign for more than you are willing to lose. And be willing to accept that the fact that your relationship with the primary borrower may be permanently damaged if you are forced to step in and cover their obligations.

Lesson #3: LOANS GROW: I cannot emphasize this point enough, it really burned me: I did not co-sign a loan for 60K, I co-signed for 45K, and without my knowledge the primary borrower capitalized the interest during the first 18 months of the loan, which they were allowed to do, but it caused the loan to grow by 33%. So when it came time to guarantee the loan, I was on the hook for 60K, which I had never originally agreed to.

Lesson #4: SALLIE MAE DOES NOT CARE: And why should they? This is business. As co-signer, you are the guarantor of the loan, you have to make good on the obligation when the primary borrower defaults. In fact, as guarantor, the loan and collection agencies will go after you harder than the primary borrower. Do you have a good credit and collateral, such as a house? Well this binds your obligation even more tightly. When loan and collections agencies see that you have the wherewithal to pay, they will not let you off the hook. And they don't care if paying off their loan puts you on the street. This is business and you have to pay up. Understand this black and white reality before you co-sign a loan.

Lesson #5: DON’T DELAY PAYMENTS: Forbearance and deferments are often mentioned as options for helping out on loan obligations, but do not fall into this trap: they make a bad loan situation worse, they don't help. Deferment does not prevent interest from accumulating: you'll just have a bigger loan to pay when the deferment ends. Student loans typically give you a deferment grace period, usually 6 months, before you have to start paying back the loan. Most of us have to use this initial grace period, but please avoid it if you can, it just makes your loan grow larger. Forbearance is another method of delay, but it requires you to make the loan current before the loan agency can talk to you. In other words, you have to be paid up on what you currently owe before the loan agency will talk to you about forbearance. Think about this Catch-22: you can't pay your current loan obligations, so you ask the loan agency for help. The loan agency won't talk to you until you make the loan current. Never use deferment or forbearance, they make your bad situation worse.

Lesson #6: NO LEGAL RECOURSE: Student loan debt is not dischargeable in bankruptcy court proceedings, it is debt that you will carry for life until it is paid off, regardless of what happens to you. And don't assume that the loan agency will only take legal action against the primary borrower in a default situation: they will also take legal action against you. Remember, you are equally responsible, you will be held legally accountable. And don't think that you can sue the primary borrower. You can only sue them if you have a separate promissory note with them, signed and notarized, that they have defaulted on. And even if you do, it is expensive and time-consuming to sue someone, especially if they have moved out-of-state, and practically impossible if they have moved out-of-country. You could probably never come out ahead, unless the amount owed was so large as to make it worth it. Unless you are wealthy, or a big organization, do not rely on your option to take legal action in the future, it's often just not practical.

Lesson #7: WOULD I DO BUSINESS WITH THIS PERSON?: When you co-sign for a family member, there is a certain level of built in trust in the relationship, but when you co-sign for a friend, or girlfriend, or boyfriend, you are putting your faith in the future: faith that they will be around in the future and that they will always have your best interests at heart. Please wake up. People take advantage of other people all the time. Especially when it comes to money, people get scared and choose to hide under a rock, disappear, ignore the problem as if it does not exist. If you are the co-signer, you are the guarantor. If the primary borrower understands this, then they can choose to disappear and leave you holding the bag. Do not assume that the person who cares for you now will always care what happens to you. Business is business, personal is personal. When you are asked to co-sign for a loved one, ask yourself first: do I want to go into business with this person? How do they resolve conflict? If they get into trouble one day will they work with me? Or will they disappear on me? Do they have a conscience, and will they care how this affects me? Or will they see an opportunity to be off the hook? Ask yourself these hard questions. And don’t assume that they will think as responsibly as you. Don’t assume that they care what happens to their credit score, or what this means for the future. Treat the primary borrower as a person you are doing business with, and therefore someone who you need to rely on when times get tough. Chances are, you are the more responsible person here, so ask yourself, can I really afford to go into business with this person?

Lesson #8: PROTECT YOURSELF: If your credit score gets damaged over a bad loan, your total financial life will be affected for a long time. It doesn't matter how good your intentions are, it doesn't matter why you got into a financial bind, it doesn't matter that your family member was sick, or that you were going through a hard time, or that you are low on money because you gave it all to charity. The current system of credit scoring requires you to keep your total financial profile in a healthy state at all times. If you are delinquent on payments, or worse, default on loan obligations, then your credit will suffer and you will be affected for a long time. You will be unable to qualify for loans, you will be unable to get good interest loans. Think about the effect this will have on your family in the future: not being able to afford a house for them because you can't get a loan, because you made a good faith error several years before. That's the reality you have to avoid, so protect yourself at all times.

Lesson #9: AND FINALLY: Some people reading this will feel that I am missing the point: that of course loans carry obligations, and of course there are consequences if loan payments are missed. For the record, I relied on Sallie Mae loans to get me through college and grad school. I made all my payments on time, I paid my loans off, I even used the available 6 month deferment. But this only worked because I was responsible, because I had a plan, because I understood my monthly and total financial obligations at all times, and never made a life decision that would compromise my ability to pay. Cold reality: many people in this world are not responsible, they don't think through the consequences of their decisions, they are unable or unwilling to look at the hard facts. When you co-sign with one of these individuals, as I did, you are tethering your good name and your financial future to them. If they fail in their responsibility, they will take you down with them. Do not let this happen, protect yourself, you have worked too hard in your life to let an irresponsible person take you down. I hope you have found this posting useful. Please pass it on so that everyone can learn from my mistakes and hard-earned lessons.

Message 1 of 92

Re: Cosigning Student Loans - Learn From My Mistakes - Please Read

This is good not only for people who are considering co-signing, but a MUST READ for students who need co-signers. I remember needing a co-signer at one point in history, and in retrospect I am very happy that they decided not to, and that I waited and fixed up my credit so I wouldn't need one.
Great post.
Message 2 of 92
Valued Member

Re: Cosigning Student Loans - Learn From My Mistakes - Please Read

The one thing I just want to point out is that deferment isn't always bad. Medical residents have to, for example. However, they also know they will have a good paying job eventually. I agree, definitely try to avoid it if it is for an inability to pay that has no end in sight.
I'm glad you will be off the hook after such a short time, and aren't stuck with the entire loan. That is ridiculously unfair.
4/28/08-EQ 668
5/2/08- EQ 687 TU 670
6/15- EQ 722!!! TU 687
Message 3 of 92
Established Member

Re: Cosigning Student Loans - Learn From My Mistakes - Please Read

Great posting- It is sad that the person you cosigned for didn't honor his word. I went through the same experience. My mentor cosigned for my student loan with SallieMae and I had to pay off even sooner because I didn't want to damage our relationship and the trust he had put in him.. I had to take a $10K cash advance on 0.00% APR on one of my credit card to pay this off- as much as I knew this would affect my credit score (715)
Message 4 of 92
Senior Contributor

Re: Cosigning Student Loans - Learn From My Mistakes - Please Read

Yikes, it sounds like you have learned some extremely expensive lessons. Cosigning anything is a very dangerous act: there must be some reason the person cannot find a lender, so the decision to cosign is basically a bet. The cosigner is betting that, based on their personal knowledge of the borrower they can do a better job than experienced professionals at predicting their future behavior. While "past performance is no guarantee of future results," as the boilerplate on so many ads says, in many cases it is the best available predictor.

I've read some financial planners suggest instead of cosigning consider making an outright gift, as with a gift you know where you stand and presumably won't give money you don't have.

At my workplace when interviewing job candidates we are trained to focus not on hypothetical "what would you do it" questions but on actual past behaviors: "tell me about a time when you..." and then keep probing for specifics on what they did in that situation.
TU 791 02/11/2013, EQ 800 1/29/2011 , EX Plus FAKO 812, EX Vantage Score 955 3/19/2010 wife's EQ 9/23/2009 803
EX always was my highest when we could pull all three
Always remember: big print giveth, small print taketh away
If you dunno what tanstaafl means you must Google it
Message 5 of 92
Established Member

Re: Cosigning Student Loans - Learn From My Mistakes - Please Read

Great advice! I hate to say it, but if I cosigned for a girlfriend (not saying this is your experience) and she ditched town -- she would be meeting Mr Hyde  Robot Mad ... lensed and cleansed.
7/3/2008 TU-776 EQ-809 EX-815
Message 6 of 92
New Visitor

Re: Cosigning Student Loans - Learn From My Mistakes - Please Read

My heart goes out to you. My stomach was in knots for you just reading about your situation. Thanks for the lessons learned. I co-signed a private education loan with my ex husband. I wish I had someone like you back then to sit me down and make me really think. Unfortunately, I was young and naive and never thought twice about co-signing. Even though the original loan amount was small by most standards (less than $8000), here it is 10 years later and that stinking loan is still attached to my credit rating. It's barely halfway paid off with another 10 years to go. The ex is a bit of a deadbeat so after some late payments a few years ago, he has since only made the minimum payments. At this rate, I will be ready to retire when that stupid thing is paid and off my reports. I am very conscientious about my own financial health and have less than $1000 on a credit card, a little of my own student loans, and a reasonable mortgage. BUT because I am forever listed as co-signer of this silly loan, it actually drags down my FICO rating. I could suck it up and pay off the whole balance myself in a few months time....which causes me to feel sick to my stomach. Its my only option besides watching this thing languish for 10 more years.
Message 7 of 92
New Visitor

Re: Cosigning Student Loans - Learn From My Mistakes - Please Read

Thank you so much for this information!!!! Unfortunately I am in the same exact position.  SM hounds me more than the loan owner!!!!  Where exactly in the fine print did you find the infomation about getting out of this trap by paying 24 consecutive on time payments?  Your help is greatly appreciated!!!
Message 8 of 92
Frequent Contributor

Re: Cosigning Student Loans - Learn From My Mistakes - Please Read

I'm in the same situation and called Sallie Mae last night.  I am the co-signer on 3 student loans for my son and he missed a payment back in September of 2007.  All is current now and have been for 1 year however Sallie Mae tells me that if you become past due on day 31 than you NO LONGER qualify to be released as a co-signer for the life of the loan!  I said to them that their website states that once 24 months of consecutive payments are made, you can be released as a co-signer.  I spoke with a supervisor last night from Sallie Mae and he said I would never be able to be released due to the fact that a payment was missed.  NEVER ever co-sign for a student loan.  My debt to income ratio is terrible due to this and it is not even my debt.  My utilization on these student loans is 138% and there is absolutley nothing that I can do unless we can find a lender who will consolidate the loans for my son and get my name off of them. 
Message 9 of 92
Frequent Contributor

Re: Cosigning Student Loans - Learn From My Mistakes - Please Read


sunnyday wrote:
 My debt to income ratio is terrible due to this and it is not even my debt. 

This is where you are is your debt.  When you cosign for any loan,  you have the same responsiblity  and repayment obligation as the main borrower. 
Ex-Financial Aid Officer

Ex-Student Loan Collector
Message 10 of 92