Sallie Mae Cosigner Liability
- 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.
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?
Your question is brief, but touches on several separate issues, which I discuss below. Following this discussion are my recommendations.
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.
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.
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.
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.
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.
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.
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.