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Sallie Mae Cosigner Liability

Can a cosigner settle a Sallie Mae loan if the primary borrower defaults?

I have a Sallie Mae loan which has gone into default. In addition, a third-party collection agency is involved and is attempting to collect the debt from the co-signer, who lives in MA. I've talked to the collection agency to no avail. What recourse the the co-signer have in settling the debt?

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Bill's Answer
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Updated: Oct 21, 2014

Piggy Bank & Student Debt
Highlights

  • A co-signer guarantees payment in case the primary borrower defaults.
  • A collection agent may be willing to accept a lump-sum settlement.
  • Cosigning for a friend could put a serious strain on your relationship.

Your question is brief, but touches on several separate issues, which I discuss below. Following this discussion are my recommendations.

Cosigner Liability

A cosigner guarantees payment in case the primary borrower defaults. The lender will report the account as a derogatory item on a co-signer’s credit reports if the primary borrower fails to pay.

Quick Tip

Need a student loan? See the Bills.com resource Student Loans resource page. Problem with a student loan? Learn more about Student Loan Consolidation.

Cosigning allows the primary borrower to obtain more favorable loan terms and to begin rebuilding a credit rating by offering the opportunity to establish new accounts with positive payment histories. However, if the primary borrower does not repay the loan as agreed, the co-signer shoulders the debt. If the co-signer is unable or unwilling to pay it, the cosigner’s credit will likely drop significantly. A drop in credit score may not only make it more difficult to obtain new credit, but can result in increases in the interest rates on current debts, as creditors may decide the co-signer has become a higher default risk.

For the benefit of readers who are considering cosigning a loan, I generally discourage it because of the risks associated with being a co-signatory. In my capacity at Bills.com, in my personal life, and elsewhere, I have seen too many people who have cosigned loans for people whom they trusted end up in serious financial hardships when their friend or loved one failed to pay the debt as promised. Co-signing for a friend could put a serious strain on your relationship, especially if your friend or family member is unable to repay the loan. Also, if the social relationship ends, you two would be tied together financially until the loan is repaid. There is no, “We stopped being friends so I’m not a co-signer anymore,” clause excusing a cosigner from the contract in any loan document I have seen.

Cosigner Recourse

Cosigners rarely have a written or even spoken contract with each other. The implication in most situations is that the primary borrower is responsible for payments. If this expectation is reasonable, then if the primary borrower defaults and the co-signer makes the payments, then the cosigner has a cause of action against the primary borrower to recover their damages.

If the primary borrower has defaulted, the cosigner may negotiate with the creditor to settle the debt. A cosigner should open negotiations as a matter of course with the creditor. The cosigner should learn if the debt is still in the hands of the original creditor. If so, then the original creditor may be reluctant to negotiate a settlement for less than the full balance. If the collection account is in the hands of a collection agent, it most likely purchased the collection account for pennies on the dollar. If this is the case, the collection agent may be willing to accept a lump-sum settlement for 10-15 cents on the dollar.

Sallie Mae at a Glance

SLM Corp., also known as Sallie Mae, was the US’s largest originator of federally insured student loans. It employs 8,000 people, and manages more than $180 billion in debt for more than 10 million student loan borrowers. The company was originally created in 1972 as a government-sponsored enterprise (GSE) and privatized its operations in 2004. Sallie Mae also originates and services private student loans.

Recommendation

As a cosigner, you agreed to pay the debt if the primary borrower defaulted. If Sallie Mae still owns the debt, open a negotiation with Sallie Mae for a lump-sum settlement of the debt. Sallie Mae may or may not be receptive of this overture, especially if the debt is small and the primary borrower has a checkered payment history. However, Sallie Mae has no legal requirement to settle the debt for less than the face value.

If Sallie Mae sold the collection account to a third-party collection agent, you will probably have much better luck at negotiating a lump-sum settlement.

Once the debt is paid, open a negotiation with the primary borrower to discuss when and how he or she can repay the debt to you. To learn more about negotiating with Sallie Mae, see the Bills.com resources Sallie Mae Loan Forbearance and Sallie Mae Loan Settlement. To learn more about student loans, read the Bills.com resource Student Loan Payment.

I hope this information helps you Find. Learn & Save.

Best,

Bill

Bills.com

34 Comments

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  • ND
    Apr, 2014
    Nancy
    I co-signed a two student loans for my sister from Citibank in 2007 for $10,000 (while I was still in graduate school). I later find out I was also a co-signer for another loan from Sallie Mae. The loan amount was for $33,000. The loan amount now is $47,000 (seven years of acrued interest at a rate of 4.5%). I could not remember for the life of me signing a sallie mae loan for $33,000. I know I would never do that, but sure enough when I would call sallie mae they told me I was a co-signer. Finally, one day, I call sallie mae and ask them to send me a copy of the signed contract. When I received the contract I can clearly see that the signature was not mine. My sister had used the information from the Citibank loan (I actually signed this loan) and used my SS# and signature to obtain the sallie mae loan. Because I did not actually sign and agree to the sallie mae loan what re-course do I have? What should I do? It is unfair for me to be responsible for $47,000 I did not co-sign. I confronted my sister and she admitted she forged the loan...never even apologized. I haven't take action against the forgery for fear of what will happen to my sister (I know I am an idiot for caring what happens to her after all the harassing calls and dive on my credit score). What should I do since my signature is not the one used to co-sign the loan? Thanks.
    0 Votes

    • BA
      Apr, 2014
      Bill
      None of your options are very appetizing.

      On one hand you can contact Sallie Mae and contest your signature, with the claim it is a forgery. In this case you may get off the hook for paying the loan; however your sister may face prosecution for fraud.

      Your other option is to remain silent about the forgery and reach some agreement with the Sallie Mae. If you don't reach an agreement, then you will possibly be confronted with a lawsuit leading to a public judgment and liens, levies and garnishments.

      In the bottom line, your best course of action will be to convince your sister it is in her best interest to reach an agreement with Sallie Mae and make her payments on time. If she is not willing to cooperate, then you will have to make a very difficult personal decision.
      0 Votes

  • AG
    Jan, 2014
    Amy
    My husband has a few loans through Sallie Mae for grad school. He has since graduated and has a full-time job. My parents — who make a significant amount more than my husband — were co-signers on his loan. My husband and parents called to make arrangements for repaying this loan (he has never defaulted!) Sallie Mae bases his monthly payments on my parent's salary. (More than $300,000 a year MORE than my husband's). SM is trying to collect $600+ a month from him. If he has never defaulted, and is willing to pay monthly based on his salary, is this fair?
    0 Votes

    • BA
      Jan, 2014
      Bill
      I assume your husband is in negotiations with Sallie Mae to negotiate a payment different from the one he agreed to when he signed the loan application and contract. Your husband should take the Sallie Mae loan contracts to a lawyer who has contracts litigation experience in your state. Ask the lawyer to review the contracts, and give an opinion if Sallie Mae is overstepping what was agreed to in the contract.
      0 Votes

  • GK
    Dec, 2013
    Gabi
    My husband and his ex-wife consolidated their Sallie Mae loans when they were married. She is the primary lender and he is a co-signer. She is not paying her portion of the bill and my husband can only afford to pay his portion, not hers too. Is it possible to legally require her to refinance the loan and split the remainder in half since she isn't paying anything now?
    0 Votes

    • BA
      Dec, 2013
      Bill
      Your husband should talk to his divorce lawyer to learn if what you suggest is possible, from a legal perspective. Certainly a refinance is possible in theory, assuming both borrowers qualify.
      0 Votes

  • DJ
    Nov, 2013
    Dan
    I live in Indiana. My daughter refuses to pay her student loans that I have co-signed. 1.) How likely am I to receive some kind of recourse if I pursue legal action against her? 2.) Assuming I accept the hit to my credit, if I stop paying the loan will Key Bank take collection action (garnish wages, put a lien on my home, etc) against me or my daughter first - she is employed and has wages that could be garnished. Thanks.
    0 Votes

    • BA
      Nov, 2013
      Bill
      I do not understand your first question.

      Regarding the first part of your second question, the loan's history should appear on your credit reports because you are the co-signer. If the account becomes delinquent, you will have no say whether the lender includes this derogatory in your credit reports.

      Regarding the second part of your second question, co-signers have 100% liability for the debt. The lender has the option to pursue one or both borrowers, and can legally demand one or the other to pay up to 100% of the balance due. Or, it can collect 40% from one and 60% from the other, or any combination it wants up to 100%.

      Collection agents are really unpredictable. It would be folly for me to say, "The lender will pursue your daughter first, and then you," or vice-versa. The safest thing to assume is the lender or its collection agents will pursue you both equally at the same time, to the fullest extent allowed by your state laws.
      0 Votes

  • BG
    Jul, 2013
    Becky
    I am a cosigner for my daughter's private student loans through Sallie Mae. I am making payments but not what they say is the minimum which is over $1,000 per month. Can they levy my bank account even though it is a joint account with my husband who has nothing to do with the loan? I live in the state of NC. From earlier posts I see they can garnish my wages but a judgement must be first filed. am I correct on that?
    0 Votes

    • BA
      Jul, 2013
      Bill
      Joint financial accounts, such as a checking or savings account, are not exempt from a judgment-creditor's account levy. Put more plainly, accounts with your name on them are fair game. If Sallie Mae or another creditor obtains a judgment against you, the other account holders on your joint accounts should withdraw any funds they may have in those accounts and deposit them in accounts in their names only.

      You mentioned North Carolina. North Carolina's wage garnishment law is a bit tricky and does not follow the general rules. North Carolina law prohibits its courts from ordering a wage garnishment on a judgment obtained in North Carolina. That's good news for North Carolina consumers, but there's a twist in North Carolina's rule. If the creditor receives a judgment in a court outside of North Carolina, the creditor can domesticate the judgment in North Carolina and receive a wage garnishment order based on that foreign judgment.

      See the Bills.com article North Carolina Collection Laws to learn more about your rights and liabilities.
      0 Votes