Sep 4, 2024
It’s common for parents to co-sign student loans on their children’s behalf. But sometimes, that decision can backfire in a serious way, as in the case of Rebecca and Sabrina Finch.
In 2007, Rebecca co-signed a student loan for her daughter, Sabrina. But as Sabrina told CNBC, she then fell behind on her bills due to medical issues that made it difficult to work. Her lender excused her remaining student loan payments after she provided proof of a disability — only to then transfer that loan to her aging mother.
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Now, at 85 years old with medical issues herself, Rebecca is on the hook for Sabrina’s loan payments. But with a monthly income of just $1,650 from Social Security, there’s no way she can afford to pay off Sabrina’s balance of over $31,000. And Sabrina says both women are worried about her lender going after Rebecca’s house to get its money.
If you’re thinking of co-signing a student loan, whether for a child, spouse, or another family member, it’s important to recognize and weigh the dangers before you sign on the dotted line.
The problem with co-signing a student loan
Any time you co-sign a loan, you take on the financial responsibility of repaying it. If the person you’re co-signing for stops paying their debt, the lender in question can turn to you for repayment instead.
An average of 8.15% of student loans are in default at any given time, says the Education Data Initiative. And since 2011, an annual average of 471,000 students have defaulted after their second year in repayment.
Meanwhile, LendingTree reports that 93.1% of private undergraduate student loans and 69.2% of private graduate loans had a co-signer for the 2023-2024 academic year. That’s troubling, because while federal student loans come with protections that include forbearance and deferment, private student loans don’t. Put another way, there’s generally less flexibility in repaying a private student loan — whether you’re the primary borrower or the co-signer.
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Can a lender actually take your house?
Circling back to the story above, there’s concern that 85-year-old Rebecca will lose her home if she doesn’t repay her daughter’s student loans. If you’re wondering whether that can actually happen, the answer is, maybe.
Student loans are typically unsecured debt, which means her lender can’t just take her home if she stops paying. But if she becomes delinquent and then defaults on the loan, Sabrina’s lender could sue Rebecca to place a lien on her home to repay the debt.
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However, even if a lender is able to place a lien on a home, which would then technically give it the right to force a sale, the process of doing so could be costly and complicated. A more likely scenario is for the lender to wait for the house to be sold and then get repaid from the proceeds once that happens.
Now the good news is that Social Security benefits are generally protected from garnishment if you default on private student loans. However, those benefits can be garnished following a default on federal student loans.
So in Rebecca’s case, her primary income source is probably safe. But that doesn’t completely solve her problem. Her best bet is to apply to have her daughter’s student loans discharged on the basis of her not being able to make payments.
Private student loans are generally very difficult to get discharged. But in cases where the loan is truly not payable, there’s a smidge of hope that a lender might write off the debt rather than pursue it. That’s not something borrowers can count on, though, which is why you may want to think twice before agreeing to co-sign a student loan for a loved one.
Sabrina says she submitted the forms to have the loan discharged on her mother’s behalf on July 26 and is still waiting for her application to be processed.
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Maurie Backman has been writing professionally for well over a decade. Since becoming a full-time writer, she's produced thousands of articles on topics ranging from Social Security to investing to real estate.
