What To Do If Your Child Has Defaulted On A Loan You Cosigned

Because most students may not have the credit necessary to be approved for a student loan, many parents find themselves in a position where they need to cosign for their child.

While a lot of financial advice says it's too risky for parents to cosign, the reality is parents want to see their children go to college and will often do whatever it takes to see that dream come to fruition.

As a cosigner, the parent is also responsible for the debt, so there are consequences for them if a child defaults on the loan. If left unresolved, defaulting can lead to lower credit scores and the potential garnishment of wages for both the parent and child.

It can also affect future employment opportunities. Depending on some restrictions and state law, employers may also look at credit history as a part of the application process. In the employer's eyes, defaulted student loans could show lack of responsibility and could block a job offer for the parent or child.

While the cosigner should be notified of a missed or late payment by the loan provider or servicer, there are cases in which this may not happen. Here's how you can tell if your child may have defaulted on their student loan and what you can do to repair the situation.

Has My Child Defaulted on a Student Loan?

"If a parent has noticed their credit score take an inexplicable hit, they may need to see what is going on with their child's student loan," said Fausto A. Rosales, a consumer litigation attorney based in Miami who handles student loan repayment cases.

Rosales said this is how most parents find out about defaulted student loans, especially if for some reason they haven't received a late or missed payment notice from the student loan provider or servicer.

"Often times, the children are afraid to let their parents know what's happening," said Rosales. Parents may want to encourage conversations with their child about the status of the loan. Open communication like this can make all the difference when trying to avoid defaulting on student loans.

The student "may have also used the address they had while they were in school instead of their home address." Parents should confirm that the loan provider and servicer have both the cosigner's and borrower's correct mailing address. Additionally, parents can often get access to manage the account online and stay on top of the loan.

Call the Loan Servicer Immediately

As soon as a parent discovers that their child has defaulted on the cosigned loan, they must call both the loan provider and servicer, if they are different.

"A loan servicer's main goal is to get someone on a payment plan that makes sense for both the person and the company," said Rosales.

This means you should work with the servicer to reach a payment arrangement or settlement that you and your child can feasibly pay back.

Consider Repayment Options

After agreeing on the repayment terms, it's time to consider repayment strategy. At this point, parents sometimes take a more active role in paying back the loan.

"One method I've seen parents use when their child has defaulted on a loan is having the parent take over the loan payments and then having the child pay the parent directly each month," said Rosales.

If the loan has reached the point of acceleration and the entire balance is due, the parent can consider taking out another loan in their own name to pay off the defaulted loan. Then the child can pay them back. It's not ideal, but it does happen, albeit rarely.

Not All Is Lost

There's no doubt that having your child default on a student loan you cosigned is frustrating and stressful. But it's often fixable. The main thing to keep in mind when it comes to defaulting on student loans is that you can work with the servicer on a settlement. All parties involved want the same thing - to have the debt paid off.