Dear Debt Adviser,
Our daughter borrowed money for her college, which we co-signed. Now, she stopped going to school and had a baby. Sallie Mae has been calling us to pay her student loan. They said they might turn us over to a collection agency. Any advice, please.
— Peni

Dear Peni,
My advice is to ask your daughter how she plans to pay back her student loan. Morally, it is her loan. She incurred the debt. She left school. She owes the money. Legally, you are all on the hook for the bill. The reality is that you were co-signing for a debt that is very difficult, if not impossible, to be rid of any way other than by paying what is owed. Government-backed student loans are not usually eligible for bankruptcy protection, except under very limited circumstances. The responsible party — that means all of you — must prove “undue hardship.” That basically means unless you are physically unable to work and earn an income, you do not qualify to have the debt liquidated in a bankruptcy.

My recommendation would be to encourage your daughter to work with Sallie Mae on a repayment plan that you can afford to fund before it is placed for collections. I think it is important for her to stay in the payment loop, even if you have to provide the cash. This way, she stays connected to the debt and should her situation improve — or yours deteriorate — you can more easily change the arrangement.

My reason for recommending that you avoid collections is because next to the IRS, Sallie Mae has some of the most powerful collection tools available. Your paycheck could be garnished and your state and federal income tax returns can be withheld. Your credit report will show the delinquency until it is paid, and not just for the customary seven years. In addition, you will be charged late fees and collection costs that will be added to the amount owed on the student loan. Not to mention that your daughter will not be eligible for additional loans should she decide to go back to school. Phew!

First, have a firm, honest conversation with your daughter, and determine how much she can afford to pay. It must be something, no matter how little. Next, armed with the amount you can afford and want to pay, have her contact Sallie Mae. She should tell them she is committed to paying off the student loan, and discuss the amount that she and you can afford to pay monthly. Sallie Mae has many options available to help her repay the loan in a manner that is affordable, but you need to act quickly. Once the loan is in default, the repayment options decrease substantially.

I also suggest that in your conversation with your daughter you clearly let her know that you are helping only until she has a job, can get a personal loan or can find work that qualifies for loan forgiveness. There is a Public Service Loan Forgiveness Program that was created to encourage individuals to enter and continue to work full time in public service jobs. Under this program, she may qualify for forgiveness of any remaining balance due on eligible federal student loans after making 120 payments on loans.

It is human nature to want to help someone, especially a family member. However, when that help involves co-signing a student loan, my suggestion is to say no. Only say yes to co-signing if you are willing and able to pay the loan should the other party be unable to pay. Your own finances should never be put in jeopardy to help someone else’s.

The other potential negative side of co-signing is that it can ruin friendships and family relationships when a co-signer ends up having to pay the loan. The co-signer feels betrayed, and the borrower feels guilty or even angry at the co-signer for not doing more to help. Shakespeare said it well: Neither a borrower nor a lender be.

Good luck!

Ask the adviser

To ask a question of the Debt Adviser, go to the “Ask the Experts” page and select “Debt” as the topic. Read more Debt Adviser columns and more stories about debt management.

Bankrate’s content, including the guidance of its advice-and-expert columns and this Web site, is intended only to assist you with financial decisions. The content is broad in scope and does not consider your personal financial situation.  Bankrate recommends that you seek the advice of advisers who are fully aware of your individual circumstances before making any final decisions or implementing any financial strategy.  Please remember that your use of this Web site is governed by Bankrate’s Terms of Use.