Today, more than 90% of private student loans require co-signers, up from about 50% six years ago, The Wall Street Journal reports.
That means more and more parents and grandparents are on the hook for student loans when young graduates can't pay. As a result, many parents and grandparents are forced to file for bankruptcy.
Shedding student loan debt in bankruptcy, however, is far from a walk in the park.
While the majority of student loans are federal, an increasing number of students now rely on private student loans to cover their expenses. The problem is that private student loans generally have much higher interest rates than their federal counterparts. On top of that, students with private loans can't defer or apply for income-based repayment like students with federal loans can.
Most private student loans also require co-signers. If the primary borrower can't pay, private lenders then go after the co-signers, typically parents and grandparents. These co-signers sometimes end up filing for bankruptcy to put an end to the harassment and shed their debt burden.
As we've discussed here before, it's exceedingly difficult to discharge student loan debt in bankruptcy. Co-signers who file for bankruptcy go through the same process as the student borrowers themselves. That means in order to shed student loan debt, they have to show that repaying the loans would cause them "undue hardship."
The "undue hardship" standard has come under fire for being both harsh and vague. There's no clear definition of the standard. However, borrowers generally must show that the situation is hopeless, meaning there's absolutely no way they'll be able to pay back the loan.
For grandparents on a fixed income, that could be somewhat easy to prove. Middle-aged parents and recent graduates, on the other hand, generally have a much harder time. It's even an uphill battle for permanently disabled graduates, according to a New York Times article.
It doesn't look like things are going to change any time soon for student loan co-signers. In the highest court ruling on the issue, the Third Circuit Court of Appeals held that releasing co-signers from their obligations could "affect the economic viability of the student loan program."
So for now, co-signers beware.