Dear Dr. Don,
I have a question about student loan consolidation. A while back, I was a co-signer for a friend to help him out in a tight bind. Now, I regret making that decision. Upon his graduation a couple of years since, he was told I could get off the loan by simply writing a release form. Soon after, he told me this wasn't possible since he was making just interest-only payments.
The lender is Sallie Mae, and the loan is a Smart Option Student Loan in the amount of $18,000. I was hoping he could consolidate the debt or possibly even refinance. One thing I did notice when logging in to the account was that his interest rate was relatively high, at 10.375%. We're both starting to realize the effects of co-signing because he's trying to do his best, but I'm still on the hook. Any ideas?
-- Dan Debtor
Co-signing can impact your credit score. Check it for free at myBankrate.
While many people are well-educated in traditional areas, many need a lesson on the dangers of co-signing. It is something that we try to teach about here all the time. Unfortunately, many people get "schooled."
The risks of co-signing
When you co-sign a loan, you agree to share in a financial risk that the lender would not take on without you. It may be unusual for a friend to step up and accept this responsibility. It's not unusual for the co-signer to later regret that decision and look for a way to exit that agreement.
I discussed your situation with a spokeswoman at Sallie Mae. Her assistance was invaluable in helping me frame this reply.
Private education loans, such as the Sallie Mae Smart Option Student Loan, are unsecured consumer loans -- not backed by the government or secured by a tangible asset such as a car or home. The loan approval and the actual interest rate are determined by the borrower's and co-signer's creditworthiness. When the co-signer signs the promissory note (i.e., the loan contract), he agrees to be "jointly and severally" liable for the loan, which means that the co-signer can be expected to step up to the plate regardless of the primary borrower's ability or willingness to pay.