Mom's on the hook for co-signed student loans
The loans are 90 days late and her credit score is in jeopardy
To Her Credit
Sally Herigstad is a certified public accountant and the author of "Help! I Can't Pay My Bills: Surviving a Financial Crisis" (St. Martin's Press, 2006). She writes "To Her Credit," a weekly reader Q&A column about issues involving women, credit and debt, for CreditCards.com, and also writes regularly for MSN Money, Interest.com and Bankrate.com, and has guested on Martha Steward Radio and other programs. See her website SallyHerigstad.com
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Dear To Her Credit,
I co-signed for my children's student loans, but they are
both behind on their payments, which is hurting my credit score. Some have been
reported as 90 days late already. What can I do to help this? -- Elisa
When you co-sign for a loan, the lender has a contract with
both the borrower and the co-signer. Although you never saw the money and or
benefitted personally from the student loans, in the lender's eyes you may as
well have. You are obligated to pay the loan if your children do not.
There is nothing you or your children can do to release you
from the co-signed loans, short of resolving the debts. The delinquent payments
will definitely affect your credit and drastically so.
With the debts running 90 days late, your credit is not the
only thing you need to worry about. The lenders are sure to take collection
action, and if they can't get payment from your kids, they will come after you.
Collection can take the form of letters and phone calls, and quickly proceed to
garnishment of your bank accounts and paychecks.
If your children are having a hard time finding work in
their chosen fields -- an all-too-common problem right now -- they still need
to face their debt problems head on. Ignoring them won't work,
especially with you as a co-signer. Their first post-college lesson is responsibility
for debt -- even when things don't go as planned.
Sit down with your kids as soon as possible and tell them
the truth. Their problem is turning into your problem, and this is serious. A
couple of delinquent student loans and the resulting collection actions could
sink your financial ship. And unlike your kids in their 20s, you don't have 40
years between now and retirement to recover.
Next, you and your kids need to look at your budgets and
figure out how much you can afford to pay on the loans every month. Yes, that
includes you. Paying the bill if your kids cannot pay is exactly what you
agreed to when you co-signed. However, your kids should still bear the major
burden of repayment. If they're not working, they need to find something,
anything, to start bringing in income. If one job doesn't cut it, they may need
another part-time job. If they can't afford to pay rent and make their student
loan payments, they might have to move home. They may even need to share your
car or take the bus to make ends meet.
Each of your children should contact his or her lender and work
out an affordable payment plan. They have a legal right to do so, and to
propose their idea of "affordable." They should support their plan
with a letter and documentation, such as pay stubs, a budget and bank
statements. They may have to complete a U.S. Department of Education Financial
Disclosure Statement as well. As always, they should keep copies and send the letter
certified mail, return receipt requested.
When a lender accepts the proposed payment plan, make sure
your child reads the agreement letter and understands the importance of keeping
up with the payment after he signs it. If he doesn't think he can actually pay
it, he should negotiate an amount that he can.
After each student loan is on a new, doable payment plan
and your kids are making their payments every month (with help from you if
necessary), your credit score should start to improve. More importantly, you won't
have to worry about collection proceedings.
In hindsight, situations like yours show why co-signing on
student loans should be a last resort. It's bad enough to graduate from college
and have loans a person cannot afford to pay, but it's much worse to have the
debts affect a parent's finances, too.
I hope your children's finances take a turn for the better
soon, and that they can have the careers and lives they dreamed of when they
set off for college.
See related: Can you remove co-signed loans from credit reports?, Should you ever co-sign a loan?
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