I thought it was a federal loan because I believe they made both types of loans. I started paying off the $153,000 interest-only loan in September 2022, while my father paid the principal and increased the balance. They only removed the interest payment after making several calls about the balance not being reduced.
My dad is trying to buy a new house and Sallie Mae won't take him out of the loan even though they said he only has to stay as a co-signer for the first 12 months after I had to start making payments. Sallie Mae has not provided us with any documentation of this. This student loan prevents him from getting a mortgage loan. What are our options and his options?
A former student and a worried son
See also: My sister owns property in Hawaii, but refuses to write a will. If she dies, will our half-brother inherit anything?
“You want to avoid a situation where you're in default and your parent has to bail you out, or you're in default and no longer have you as a co-signer.”
Market watch illustration
Dear former student,
Unfortunately, the only thing Sallie Mae SLM,
What will not be taken into consideration when deciding whether to remove your father as a cosigner on your student loan is his desire to obtain a mortgage.
Borrowers who default on student loan debt could face years of harsh penalties: They could get deductions on their tax refunds, and even have their Social Security benefits and wages garnished for student loan repayment. The Consumer Financial Protection Bureau has a guide for co-signers, and also points to research that says at least a quarter of co-signers end up paying off at least one student loan. Why am I telling you all this? Because lenders will take the cosigner from the loan when all its conditions are met.
Cosigning on a student loan comes with risks. Anyone can end up in the red after failing to repay a student loan — and there's no reason to believe they're not someone's child or parent. In fact, one-third of delinquent student loans are held by borrowers who are at least 50 years old, although older borrowers make up about 20% of federal student loan borrowers, according to recent data. Only 10% of signatory release requests are approved, the CFPB found in another study, so your father is not alone in his quest to remove himself.
I reached out to Sallie Mae about your post, out of courtesy and to see if they could provide more information, and a spokesperson told me that they only offer private student loans and make multiple disclosures to customers saying so during the application process. It also noted its cosigner release policy, which states, “You may apply to release your cosigner from an open and active loan after you graduate or complete your degree, make 12 on-time payments of principal and interest, and meet certain credit requirements.”
The company confirmed that Sallie Mae has not originated federal loans since June 30, 2010, and does not service federal student loans. Mark Kantrowitz, author of “How to Claim More Financial Aid for College” and “Who Graduates from College? Who Doesn't?” says those trying to remove a co-signer can stack the pool more in their favor if they make sure they're processing their payments and applications correctly. I'm not saying you're doing it wrong, but I'm saying it's a very complicated process.
Make sure you put the correct loan ID number on your checks so they don't get applied to the wrong account, he says. “There is also the issue of the payment demand order, where payments are applied first to accrued but unpaid interest, not principal, and borrowers believe they can insist that payments be applied to principal. Even federal loans apply payments first to interest, and borrowers have no choice in this Matter. They also do not realize that if interest is capitalized, there will be no difference between the payments applied to interest or principal.
“Finally, the signer’s release options are not part of the promissory note, so they are entirely at the discretion of the lender,” says Kantrowitz. “In particular, all lenders who offer a co-signer release want to see payments being made by the borrower, not the co-signer. After all, once the co-signer is released from the loan, the co-signer's checks stop, and the borrower defaults. Lenders want to make sure That the borrower is able to repay the debt, so they trace the source of the payments.
There are – in theory – ways for less honest borrowers to “game” the system. “If a co-signer wanted to be sneaky, they could make payments to the borrower, who would then make payments to the lender, and the lender would be none the wiser,” he says. “But lenders also check income, debt-to-income levels, length of employment, payment history, and credit scores, before releasing the cosigner from the loan. If the borrower fails any of these criteria, the cosigner will not be approved for release.”
You want to avoid a situation where you're in default and your parent has to bail you out, or you're in default and no longer have you as a co-signer. As my colleague Gillian Berman has reported, consumer and borrower advocates have long complained that this approach to student debt collection can be overly punitive and push borrowers into more severe financial distress. My advice – both financial and moral – is boring. Follow the rules. Cross out your “t” and cross your “i” and your parent will be released as a co-signer of your student loan when it is in the best interest of all three parties: you, your parent, and Sallie Mae.
You can email The Moneyist with any financial and ethical questions at qfottrell@marketwatch.com, and follow Quentin Fottrell on X, the platform formerly known as Twitter.
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