Dear Dr. Don,
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My son took out a Sallie Mae loan for college expenses. To my astonishment, I found out that I was a co-signer. I don't recall ever co-signing the student loan documents. Sallie Mae says I have to repay the loan and that I am completely responsible for it. It sends me a statement every month and is now threatening collection action. They have not asked my son for a single penny. Although the loan is only for $6,000, shouldn't Sallie Mae try to collect from my son first before going after me?
-- John Juice
I think your first step is to review the loan documents. Sallie Mae didn't dream this stuff up. They're contacting you for a reason. If you don't have ready access to the loan documents, I'd suggest contacting the Office of the Consumer Advocate at Sallie Mae.
Without specifically referencing you, I discussed the issues surrounding the loan with Patricia Christel, a spokeswoman at Sallie Mae. Her assistance was invaluable in helping me to frame this reply.
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In the loan application process for a Sallie Mae student loan, the student and the co-signer are asked to sign the loan application and promissory note, and both receive "truth in lending" disclosure statements required by law. The promissory note clearly states that the primary borrower and the co-signer are jointly liable to pay back the loan. That means both are equally obligated, whether on their own or together. While the application process is relatively straightforward, it does require time and a thoughtful effort by the student and the co-signer. For this reason, a typical co-signer is very well aware of his or her obligation.
A co-signer is alerted as soon as a primary borrower is late on a payment. Sallie Mae also reaches out to the co-signer immediately if it is unable to locate the primary borrower. Sallie Mae, in some of its newer loan programs, sends the co-signer a monthly statement as a matter of course. This courtesy is actually a nice feature because the co-signer can determine if the primary borrower is making loan payments.
You say that Sallie Mae hasn't tried to collect from your son. Does that mean that he hasn't been receiving monthly bills? Do they have his current address?
If you want your son to pay and he's not paying because he doesn't have the money, he could explore options to request a reduced payment plan or to put the loan in forbearance. A forbearance is an agreement between the lender and the student that suspends payments for up to a year.
These options aren't free; they'll increase the interest expense. But if you want your son to repay his student loan without you contributing as co-signer, they can give him some breathing room.
Talk to your son about the student loan. Consider setting up automatic loan payments. Barring any act of forgery, you're responsible as well, so consider having the automatic loan payments coming out of your account and have your son make his loan payments to you.
Keeping both of your credit histories as clean as possible is important. As a co-signer, you are equally responsible for this student loan. Standing on principle is going to cost you principal, because it's your debt, too.