Sallie Mae Cosigner Liability

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

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Piggy Bank & Student Debt
Bill's Answer: Answered by Mark Cappel

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

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Comments (32)


Amy G.
Rochester, NH  |  January 09, 2014
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?
Bills.com
January 09, 2014
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.
Gabi K.
Shawnee, KS  |  December 24, 2013
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?
Bills.com
December 24, 2013
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.
Dan J.
Indianapolis, IN  |  November 13, 2013
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.
Bills.com
November 14, 2013
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.
Becky G.
Manteo, NC  |  July 10, 2013
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?
Bills.com
July 10, 2013
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.
JOHN S.
King George, VA  |  February 19, 2013
WHAT HAPPENS TO THE CO-SIGNER IF THE PRIMARY BORROWER FILES BANKRUPTCY?
Bills.com
February 20, 2013
If the two borrowers are married, live in a community property state, and file a chapter 13, both are protected by the stay that prevents creditors from contacting or otherwise collecting the debt. If the bankruptcy is a chapter 7, or if it's a 13 and the co-signers are not married, or if they are married in a common law state, the non-bankruptcy co-signer is not protected by the stay.

Let us say for the sake of argument that you co-signed a loan for a niece or nephew, who later files bankruptcy with a balance due on the loan. Let us say your niece or nephew's personal liability for the debt is discharged by the bankruptcy court. The lender can still pursue you to collect the debt. This is because the loan contract you signed probably gave both borrowers joint and several liability for the loan. If the loan contract has joint and several language in it, the lender has the option to collect up to 100% of the loan balance from either co-signer.

Take a copy of the contract you signed to a lawyer who has contracts or consumer law experience in your state of residence. He or she will read the contract, and advise you whether you have liability for the loan balance.
Lauren K.
Boston, MA  |  October 31, 2012
Simply to echo what you said here: Please, please DO NOT cosign a loan with Sallie Mae. It will literally be the most debilitating financial decision you make.

Additionally, please do not encourage anyone to cosign on your loan. I've conducted extensive research on this. And I know it from my own personal experience this rarely turns out well. Trust me. Sallie Mae is one of the worst lenders — if not the worst — in the country to work with.

Encourage any students you know who have other options for financing their education to leave Sallie Mae as a last, very desperate, resort.
Renee M.
Vidor, TX  |  July 29, 2012
My daughter has defaulted on a private student loan on which I was the co-signer. I received a call from a collection agency and the rep was a bully, rude, arrogant and downright mean. He had me crying so hard I couldn't breathe because of threats of lawsuits, court, etc. I told him I wasn't even sure if what he was talking about was a loan I had actually co-signed because I had started suspecting she was signing my name and using my SS # because having lived in the same house at one time, she had access to those things. He demanded my bank info and said if I didn't agree to have my checking acct debited monthly for these payments, I would face serious consequences. I was so upset at the time by his threats, I couldn't think straight. After the fact, I now realize I have nothing in writing from him; don't even know the name of the collection agency and I don't know what my monthly payments will be after the initial three months of "catch up" payments will be. Can I legally stop payment on these automatic deductions until I can get something in writing? I'm already paying on 3 Sallie Mae loans and have never been delinquent. My credit score went from 722 to 610 in four months because of this and I wasn't even aware it was going on. It took me YEARS to build my credit score from 650 to 722 after a divorce, but only a few months for it to plummet twice that much. I am distraught and can't afford another monthly payment.
Bills.com
August 02, 2012
Take these steps:
  1. Talk to your bank or credit union and explain your situation.
  2. Complete a form: Your bank or credit union will have a form you can complete to stop the ACH payments.
  3. Contact the collection agent to notify it you no longer authorize the ACH transfers from your account. Your bank or credit union may be able to give you contact information for the collection agent who withdrew funds from your account.

Read the Bills.com resource How to Cancel ACH Payments to learn more.

You have rights not to be harassed, and your possible legal obligation to pay the private student loan does not cause those rights to disappear or not apply. Read the Bills.com resource Advice If You're Being Harassed by Collection Agent to learn more about your rights.

A quick tip: If a collection agent's behavior upsets you, hang up the phone and take a walk to clear your head. Remember, you have what they want — your money — and unscrupulous collection agents lie about arrest and unplanned court action to bully people who may not have legal liability for a debt.

Joe P.
June 11, 2012
My son defaulted on several of his Sallie Mae college loans totaling about $80K. I was the cosigner. I'm 70 years old and retired my only income is Social Security and a Pension. I have a 401K and a mortgage. There is no way I can afford to pay my son's debt, either partially or over time. My credit rating dropped from 790 to 618. Assuming at some point legal action is taken against me, can they garnish my Social Security and/or Pension? Thank you.
Bills.com
June 12, 2012
Regarding Social Security benefits, the answers to your question are no if the Sallie Mae loan is private, and yes, garnishment is possible if the loans are federal. See the Bills.com resource Garnishing Social Security Benefits for a discussion of the Social Security garnishment issue.

Regarding your pension and 401(k), the answer is found in your state laws. You did not indicate your state of residence, so I cannot answer the pension part of your question.
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Joe P.
June 12, 2012
Thanks for the quick response. How do you tell if a Sallie Mae loan is private? I thought Sallie Mae was Federally Funded & Supported. My state of residence is Pennsylvania. It appears my S/S & Pension are protected under Pa. regulation. Thanks.
Bills.com
June 12, 2012
Sallie Mae was a federal entity, but in 1997 it was spun out as a corporation with its stock publicly traded on NASDAQ with the symbol SLM. Sallie Mae once originated federal student loans, but that ceased in 2010.

Review the loan documents. If your loan is a Stafford, Perkins, or Direct loan, it is almost certainly federal.
Bing L.
April 30, 2012
I am a co-signer for a private sallie mae student loan and wonder how likely they are to pursue me in court oweing $34,000. I do not care about my credit because I have no plans to buy anything needing credit in the future. The harassing phone calls and letters never stop. They know where I live and work. If I decide to stop payments, how can they make my life any worse? Would a judge in the state of Oregon realy garnish my wages or put a lien on my property if I decide to stop payments? This is all happening as the original borrower sits back and laughs.
Bills.com
May 01, 2012
When you co-sign for a loan, you take full financial responsibility for it. The creditor can certainly choose to pursue legal action against you. Given the size of the debt in question, it seems likely for that to happen, at some point, if you stop making payments. If you were sued, it is my opinion that a judgment would be entered against you and your wages would be subject to garnishment, your bank account vulnerable to levy, and your property subject to liens.

Perhaps you can seek some kind of legal action against the original borrower?
Roger P.
Portland, OR  |  April 22, 2012
I was a foolish co-signer on a Sallie Mae Private Loan and got duped by the borrower who has decided to completely stiff me with the total amount of the school loan. Anybody out there have advice on how to recoupe the money I spend to pay back the loan from the original borrower once the loan is paid off.
Bills.com
April 23, 2012
Consult with a lawyer who has civil litigation experience to learn if you have a cause of action (a legal basis for a lawsuit) against the borrower.
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