I cosigned my daughter’s private student loan. Am I on the hook if she declares bankruptcy?

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The Credible Money Coach shares information on a cosigner’s liability when a borrower declares bankruptcy. (Credible)

Dear Credible Money Coach,

I cosigned for a private student loan from Navient for my daughter in 2007. She has struggled to make payments ever since, so now she wants to file bankruptcy to end the predatory nature of the simple-interest loan that has piled on interest since its inception. The balance is $8,000 higher than when it started. My question is, if my daughter is successful getting the loan dismissed, will Navient be able to come after me for the balance? — John

Hello John, and thanks for your question. Navient made headlines in January when it agreed to settle a lawsuit brought by multiple state attorneys general alleging the lender made predatory loans and engaged in unfair practices with student loan borrowers.

Before your daughter files bankruptcy, I’d encourage her to explore whether she’s entitled to relief under the Navient agreement. The settlement doesn’t apply to every Navient borrower. However, it affects about 66,000 students who took out private student loans from 2002 to 2010 and live in the states that participated in the lawsuit.

Refinancing can be another way to lower student loan costs. You can use Credible to compare student loan refinance rates from multiple lenders.

Student loan cancellation under the agreement

Navient, which spun off from student loan company Sallie Mae in 2014, agreed to cancel loans for about 66,000 borrowers who took out Sallie Mae loans from 2002 to 2010 and defaulted. Navient says it will notify borrowers who qualify for loan cancellation under the settlement once the court approves the agreement.

Since your daughter took out her private student loan in 2007, she may qualify if she defaulted and lives in a participating state: Arizona, Arkansas, California, Colorado, Connecticut, Delaware, District of Columbia, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Mississippi, Missouri, Nebraska, Nevada, New Jersey, New Mexico, New York, North Carolina, Ohio, Oregon, Pennsylvania, Rhode Island, South Carolina, Tennessee, Virginia, Vermont, Washington, West Virginia, and Wisconsin.

If your daughter lives in a participating state and doesn’t want to wait to hear from Navient, she can reach out to her state attorney general’s office for guidance.

Discharging student loans through bankruptcy

It was nearly impossible to get student loans discharged through bankruptcy until recently. A July 2020 ruling by a New York federal appeals bankruptcy court changed the law, setting a precedent for private student loan borrowers like your daughter. It allowed a Navient borrower to discharge their loan through bankruptcy.

What happens to a cosigner in bankruptcy

When you cosigned a student loan with your daughter, you promised Navient to repay the debt if she couldn’t. That means if she defaults, Navient has the right to require you to repay the loan. And in most cases, a cosigner can still be held responsible for a debt even if the primary borrower declares bankruptcy.

In general, if a borrower files Chapter 7 bankruptcy, wiping out debts, creditors can pursue cosigners to collect them. You may have more protection if your daughter files Chapter 13 bankruptcy, which creates a new repayment schedule. So, your daughter (not you) would still have to pay her debt with Chapter 13, but with a more manageable timeline.

Alternatives to bankruptcy

John, if your daughter doesn’t qualify for relief under the recent Navient legal settlement, she should explore other options before filing bankruptcy. Since bankruptcy’s financial and credit ramifications are severe, it should be used only as a last resort.

A Chapter 7 bankruptcy typically stays on your credit report for 10 years, and Chapter 13 remains for up to seven, making it difficult to qualify for credit at favorable rates for many years.

Although your daughter may be wary of private student loans, she should consider refinancing her current Navient loan into one with a lower interest rate and more favorable repayment terms to make it more manageable. She can comparison-shop for a better loan from a private student loan refinance lender to find out what offers are available.

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About the author: Laura Adams is a personal finance and small business expert, award-winning author, and host of Money Girl, a top-rated weekly audio podcast and blog. She’s frequently quoted in the national media, and millions of readers and listeners benefit from her practical financial advice. Laura’s mission is to empower consumers to live richer lives through her speaking, spokesperson, and advocacy work. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Follow her on LauraDAdams.com, Instagram, Facebook, Twitter, and LinkedIn.