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.
When relief is possible
Co-signer release may be available once the primary borrower demonstrates a history of successfully making on-time payments and meets credit criteria. The primary borrower needs to demonstrate that he has the tools, knowledge and experience to be successful in repayment on his own.
After graduation, the primary borrower may apply for co-signer release after making 12 consecutive monthly on-time principal and interest payments. Sallie Mae looks at the primary borrower’s demonstrated success with other credit obligations (e.g., car payments, apartment rent or credit card) and reviews whether your friend has sufficient income to manage the payments. If the primary borrower meets the credit criteria, the co-signer is released from the loan obligation.
If your friend graduated recently, he might still be in what Sallie Mae calls the “separation” period and is allowed to make interest-only payments for 6 months. Once that ends, he will start making principal and interest payments on his loan. At that time, the clock will start, and within 12 months he’ll potentially be able to release you from your co-signer responsibilities.
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