Credit Regrets: I Cosigned…Now What?

If you follow the news, you’ve read about the Mason family’s struggles. After losing their 27-year old daughter Lisa five years ago, they were faced with another blow: repaying her student loans. Steve Mason cosigned his daughter’s private nursing school loans with an initial amount of $100,000. Thanks to fees and penalties, the balance his ballooned to $200,000. Faced with overwhelming debt and raising Lisa’s three young children, the Masons don’t have many options.

The Masons’ grief is undoubtedly worse thanks to their financial burdens, and while we’ve talked about the dangers of cosigning, sometimes it’s unavoidable. Despite the inevitable, there are a few options to ease anxiety and protect your finances, including:

  • Removal. In many cases, lenders allow cosigners to remove themselves from a loan after a period of timely payments. Consider the following example:

Stella bought her first condo in Chicago in 2008, a loan that was cosigned by her father, George. After six years of faithful payments, Stella would like to remove George from her mortgage loan. She calls the bank and explains the situation. Thanks to her payment history and increased income, George is freed from the initial agreement.

  • Selling. When removal isn’t an option, sometimes selling is the last resort. Let’s consider Stella and George in an alternate situation:

George’s daughter Stella is ruining his credit. He cosigned her mortgage in 2008 and since then, she has failed to make consistent payments. The bank wants their money and is holding George responsible for his cosigner duties. He decides to sell the house rather than risk foreclosure. He uses the funds to repay the bank loan.

When a borrower fails to pay, their cosigner can choose how to manage the financial burden. Learn more about your options by contacting an appropriate lawyer. They can help you weather the storm.

  • Life insurance. While it may seem morbid, life insurance is an appropriate way to protect your finances from cosigner ruin. Consider the following example:

Stephen Bartan is in his final year of medical school. He has more than $225,000 in student loans, cosigned entirely by his parents, an elderly couple with a yearly income of $79,000. Anticipating risk, Mr. and Mrs. Bartan purchased a life insurance policy in their son’s name when he entered medical school. In the event of a tragedy, the Bartans can mourn their son without worrying about his student loan payments.

Anticipating death is ugly, but then again, so is credit repair. Leave emotion at the door and make a rational decision.

  • Refinancing or consolidation.  Times change and loan terms often change with them. Consider the Bartans:

After seven years as a surgeon, Stephen is finally earning a steady and substantial wage. He has reduced his student loan debt by 25 percent and decided to refinance to relieve his parents of their cosigning duties. He sells his loans to another bank that offers a reduced interest rate. His income allows him to finance the new loan without his parents, thereby freeing them of further responsibility. The change allows Mr. and Mrs. Bartan to sell Stephen’s life insurance policy, providing them with additional retirement income.

The bottom line: While cosigning may be daunting, it doesn’t have to spell credit damage. Use the options above to mitigate risk in an appropriate way. Don’t allow vulnerability to overshadow your credit score.