THE BLOG
11/27/2013 12:09 pm ET Updated Jan 27, 2014

I Can't Pay My Private Student Loans My Parents Cosigned For

Huffington Post Reader Question

Dear Steve,

Graduated in 2012 with a Bachelors degree in Fine Arts (sculpture). Have about $70k in private loan debt. Went into forbearance, still did not find an alternative in that time. Have looked into and applied for consolidation WITHOUT cosigners, denied.

I am curious as to whether or not there are other options available. My payments are over $700/month, which I (and my cosigners) cannot pay. I have looked into consolidation, but most "new" loans are no better than the ones I currently have. I would like to file for bankruptcy, but feel I would not qualify. I have immense guilt for ruining my cosigners (my parents) credit along with mine, and NEED them off my loans. Thank you!!

Sarah

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Dear Sarah,

I understand the guilt created by the situation. It is an unfortunate byproduct of what was thought to be a helpful action by your parents at the time.

What we have here is the perfect storm. You have an investment in education that was hoped to payoff in future income to service the loans easily. There is the willingness for your parents to cosign for the loans and guarantee the payments if you could not pay. And then of course there is the educational industry to pushes loans to sell butts into seats.

You will notice that nowhere along the way do you have anyone looking at the overall situation and making hard decisions about affordability and financial suitability.

The current educational situation is like a car dealer giving you unlimited financing for a car you can never afford and getting your parents to guarantee to make the payments if you can't. In the regular world that would be ridiculous but when you stick the phrase "higher education" in the situation instead of car, it all of a sudden becomes reasonable to the majority of people.

When your parents cosigned the private student loans they agreed to 100% of the liability for the loans with none of the benefit. They said they would be responsible for the debt if you could not pay.

If you decided to pursue bankruptcy there is a chance some of the loans could be reduced or eliminated. The case that comes to mind is one in particular, 2:12-ap-00039 - Opp. This case was interesting because the consumer said the cost of their education in their field of study did not allow them to earn enough money to repay the loans.

Opp went to The Art Institutes and University of the Arts. The debtor had $183,639 in student loans. Of that amount, $52,539 was completely discharged, Sallie Mae settled a $94,100 balance for $60,000 at 3% interest, and RBS Citizens settled $37,000 at 0% interest payments at $75 per month. I call that a substantial reduction in debt and terms. You can read more about this here.

The danger in your case is your parents would still be on the hook for the debt even if your obligation was reduced or eliminated unless the lender agreed to limit their liability.

A logical path to follow here would be to sit down and have an open discussion with your parents and together you all can make a monthly full payment on the student loans. You need to start making payments and not defer payments. Deferring payments only grows the student loan balances.

No matter how much your parents might not want to start paying their percentage of the student loan full payment which you can't afford, that's exactly what they signed up to do when they cosigned. And for that, there is no reason to feel guilt. They agreed and understood, or should have, and the situation just is what it is.

You should do your best to afford to pay what you can and they should fill in the gap. That's the most reasonable and likely solution to allow all of you to move forward on a path that will really eliminate these loans in the future.

Of course if their financial situation changes for the worse, then there might be an argument to meet with an experienced bankruptcy attorney who is skilled at handling these types of situations and get all of you into a coordinated effort to file bankruptcy and deal with the private student loans at the same time.

Steve

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