Lenders who extended $132,000 in student loans to Kristina Pietras before she dropped out of the University of Toledo knew she couldn’t afford to pay them back.
But they convinced a bankruptcy judge that her parents could.
That’s how Pietras’s parents, who co-signed on the loans, got stuck paying off their daughter’s massive student-loan debt, obligations they couldn’t even shake after filing for bankruptcy protection.
Lenders had harped on the Pietrases’ decision to pay $150 a month for expanded cable and install new carpet instead of pay the student loans.
And Judge Richard Speer of the U.S. Bankruptcy Court in Toledo, Ohio, pointed out that they paid $70 a month for their daughter’s cell phone while she worked at Arby’s.
“The court is, thus, confronted with this dichotomy: the debtors, when incurring obligations on behalf of their daughter, find the means to pay for one obligation but not the other,” Speer wrote in his order denying the Pietrases’ bid to cancel the debt.
(In Kristina Pietras’s own bankruptcy, her lenders allowed the debt to be canceled without a fight.)
The Pietrases’ family attorney couldn’t be reached for comment.
As young graduates and former students struggle to find work, their student-loan obligations are increasingly falling to the family members who agreed to back the debt in the event of default. Bankruptcy lawyers report that a growing number of student-loan co-signers, especially grandparents, are trying to get rid of the loan obligations using bankruptcy, hopeful that they’ll find a sympathetic judge or a lender who’s voluntarily willing to lower payments.
No one tracks the number of student loan co-signers who file for bankruptcy to get rid of student loans, but the trend that bankruptcy attorneys see tracks with the increasing demands from the $150 billion private student-loan industry for college students to find someone to back their debt.
Today, more than 90% of private student loans require co-signers, up from about 50% six years ago, according to Mark Kantrowitz, an expert in college finance and the founder of Finaid.org. The federal government, which provides the lion’s share of student loans, rarely requires co-signers.
An examination of court documents shows that some grandparents have filed for bankruptcy after they became the target of collectors as the primary borrower struggled to repay the loans. Filing for bankruptcy protection stops phone calls and collection notices.
Parents have also tried to discharge the loans in bankruptcy to shake off payment obligations and wipe the debt from their credit reports. Even if a borrower hasn’t defaulted, mortgage lenders can factor in the debt when co-signer parents apply for a home loan or refinancing.
In many ways, the bankruptcy cases of student-loan co-signers are more emotionally charged, says California bankruptcy attorney Guy Chism. After all, they thought they were helping their children and grandchildren sign up for a better life when they agreed to back their student-loan debt.
“There’s a lot more fireworks, a lot more tears, a lot more high blood pressure and a righteous indignation that they’re being sued” over defaulted student loans, said Chism.
Federal law requires co-signers who file for bankruptcy to go through the same process as the student borrowers themselves. Both have to prove to a bankruptcy judge that repaying the loans would cause them to suffer an “undue hardship”—a legal standard that consumer bankruptcy experts have criticized as too harsh.
“If you’re waving one hand above the soil above your grave, you can almost get it discharged,” said Norman Hull, a Florida bankruptcy attorney who has represented co-signers. “There are decisions out there that are almost that bad.”
For the most part, bankruptcy judges don’t care that co-signers didn’t get to spend the student loan money themselves.
“I was receiving no benefit from the loans, and they wanted me to pay until I was 78,” said Patrick McKenzie, 61, who co-signed loans for his daughter, who worked low-wage jobs after she dropped out of college. He lost his case and said he pays about $210 a month for the loans.
The process is also expensive because it requires debtors to sue the lenders and argue against them in bankruptcy court. Michigan attorney Kenneth Wrobel Jr. said a 62-year-old truck driver decided to drop his 2010 lawsuit to discharge about $11,000 in student loans he co-signed on for his son when he realized it might cost that much to fight the U.S. Department of Education’s attorneys.
“You could burn up $5,000 or $6,000 just trying to get rid of [the loans],” Wrobel said.
Co-signing promises outlast broken relationships. In 2009, a judge told a 24-year-old single mother who co-signed on her ex-fiance’s student loans that she could afford to pay at least $100 a month to his lenders. Some lenders won’t even waive the debt for co-signers if the primary borrower dies.
The courts have tended to side with the lenders. In a 1993 decision, the highest court ruling on the issue, the Third U.S. Circuit Court of Appeals, wrote that releasing co-signers from their obligations could “affect the economic viability of the student loan program.”
“After all, the lenders seek the security of a non-student co-signer precisely because there is a commercial risk in looking only to the student for credit assurance,” the panel of judges wrote.
For aging relatives, getting rid of the co-signed loans may be easier because they can argue that they won’t be able to afford to pay the loans in the future.
Earlier this year, a 90-year-old Michigan man who was in a nursing home filed for bankruptcy to get rid of the $40,585 loan he had signed for on behalf of his grandson. Seven days later, Sallie Mae agreed to forgive the debt.
Bankruptcy attorney Jason Smalarz’s client, a 45-year-old housekeeper, also got relief. A judge ordered her to make “an obscenely small” monthly payment of about $25 for several years on a loan that her daughter borrowed before dropping out of college.
“’I just signed it,’ that’s the story you get all the time,” Smalarz said.
Editor’s note: On Friday, The Wall Street Journal’s Kelly Greene explored the peril student-loan co-signers face when borrowers default. Bankruptcy Beat’s Katy Stech expands on the dilemma faced when the co-signers themselves end up in bankruptcy to try to discharge the debt.