I only see my brother twice a year if I’m lucky, but he’s one of the most important people in my life.
I taught him how to read.
He introduced me to Agatha Christie and anime.
When I turned 30 a few years ago, he flew more than 1,200 miles to celebrate with me.
When it took him longer than expected, I encouraged him to finish college.
When I was academically dismissed, he helped me get over law school.
We’ve traveled to more than 5 different cities together.
A few years ago, he even changed his hairstyle to match mine!
I’m just kidding.
That would be weird.
When I decided not to co-sign on his student loans, I was ashamed.
My family was ashamed of me too.
I had thousands of dollars of student loan debt myself, and I knew I’d return to graduate school (i.e. potentially take on more debt).
I wasn’t in a place financially to take on thousands more dollars of additional student loan debt and, perhaps more importantly, I didn’t think I’d ever be in the position to pay it all back.
I fully understood the risks, but they were too great.
I hoped he’d understand one day.
We don’t always have a choice, but if you ever have to decide whether to co-sign on a loan for a friend, spouse or family member, consider these risks first:
1. Your credit can be damaged if the borrower defaults.
Lenders typically ask for a co-signer when they do not want to take on the full risk of lending money to that individual borrower. They don’t trust that the borrower can properly manage the debt.
This could be due to the borrower’s age (i.e. length of credit history), lack of credit, or poor credit.
When you co-sign on a loan, you’re legally obligated to repay that loan in full. You promise to pay the loan back yourself.
If the borrower happens to default on the loan, creditors can use the same collection methods against you that they would use against the borrower.
Co-signing can even impact your ability to take out loans for yourself.
Creditors can sue you.
Creditors can garnish your wages.
Creditors can even garnish your bank accounts after a judgement has been made.
Undoubtedly, late payments and defaults impact your credit score.
2. If the borrower defaults on the loan, you can be responsible for the entire balance of the debt, plus late fees, plus collection costs.
The creditor can seek this debt from you without even trying to collect the debt from the borrower first.
The rationale is that as co-signer, your credit is better and you are in the better position to actually pay the debt owed.
3. The lender can decide to sue you, instead of the borrower, if loan payments aren’t made. This includes garnishing your wages and your bank accounts.
See point number 1.
4. Even if you divorce, you can still be responsible for paying debts on the co-signed loan.
I have a friend who met her future husband while they were in high school.
They dated, fell madly in love, moved to a different city, attended graduate school, bought a house together, and more than fourteen years later, got a divorce.
They’d been together since they were 16 and 17 years old.
She co-signed on his loans when they were in college. He co-signed on hers when she went to graduate school.
They’ve been divorced for more than 8 years now, but they’re still responsible for—liable for—each other’s $70,000 student loan debt.
5. Even if the borrower DIES, you may still be responsible for paying debts on the co-signed loan.
Even if the borrower DIES.
What in the world?!
You co-sign on your husband’s graduate school student loan when you first get married.
He defaults on his loan.
Not long after, he passes away unexpectedly in a car accident.
You are legally responsible for this co-signed student loan debt.
Even after divorce.
Even after death.