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 columnist Sally Herigstad
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, and also wrote for MSN Money, and, and has guested on Martha Stewart Radio and other programs.

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Question for the expert

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

Answer for the expert

Dear 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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Updated: 12-18-2018