I discourage co-signing for two reasons: it doesn’t help the one who is making the request and it invites trouble in the relationship. The reason someone needs a co-signer is because the potential lender has determined that this particular borrower is not a good risk. Therefore, the best way to help this borrower face the issues causing concern to the lender is to NOT co-sign. The reason I say co-signing will jeopardize the relationship is because of what happens when the borrower fails to make those payments: the co-signer’s credit will be dinged and he may end up making those payments himself. I can feel the tension now.
But what if the one who needs co-signing is a spouse? My guess is that you are thinking, “This is my husband/wife! Whatever we do, we do together. Co-signing will help us both.” You may be right, but I urge you to think twice. Read on:
A True Story
When Fred and Joyce (not real names) were first married, their future looked bright. Fred had a debt free Bachelors degree; Joyce likewise had a degree — from a prestigious university — along with the debt it took to get that degree. Fred had a stable job; Joyce wanted an advanced degree. Because she didn’t qualify for the student loan required for that degree, Fred co-signed for the loan.
Fast forward ahead fifteen years. The couple has been divorced ten years. Fred has remarried, has three children and no debt other than the house. They have slashed their budget sacrificially in order to allow mom to stay home with the kids. Things are tight, but they are making ends meet.
Letters and Phone Calls
Because Joyce has fallen behind on her student loan payments, the lender started squeezing Fred with letters and phone calls. Fred called his ex-wife (whom he has had very little contact with since their divorce) to ask what was going on. “Don’t worry,” she replied. “I will take care of it.” But she didn’t. The letters and phone calls continue. Now, when Fred tries to contact Joyce (text messages…phone calls…emails) she does not respond.
Fred, with good reason, is very frustrated. The letters state that one option is to garnish his wages. This, as Fred well knows, is not an idle threat – federally backed student loans can be garnished without a law suit. Even though his divorce decree stated that Joyce would be responsible for all of her student loans, his signature on a loan document supersedes that ruling. Furthermore, his credit rating is being incrementally damaged with each missed payment.
What to do?
What can Fred do? Although he is rightly upset with his ex-spouse, he generously offered to pay for financial counseling in order to help her better manage her money. Again, no response. This is where the situation stands as I write this post. Fred, so far, has not communicated directly with the lender, but he will be doing so soon. One thing he will ask is whether Joyce’s wages would be garnished before his would be. This would seem to make sense. Another solution – a great one – would be for her to refinance the loan in her name only. However, assuming her own credit rating is shot, doing so is probably not an option. Other than taking over the payments himself (which could require his wife to re-enter the work force), there seem to be little Fred can do.
This debt will continue to plague Fred and his family until it is gone. Co-signing, for him, is turning into a nightmare.
If you are considering co-signing a loan for your spouse, I urge you to think twice. Don’t say, “It could never happen to me.” Fred and Joyce were saying that same thing 15 years ago.
Readers: Do you cosign loans? Have you done so for your spouse? Any suggestions for Fred?