If you read our Halloween-themed credit horror stories, you probably remember the story from a recent grad who co-signed her friend’s student loan debt – and found herself with credit damage when that friend stopped paying.
It’s a troubling situation and one that’s all too easy for young people to get into. While the CARD Act of 2009 blocked the under-21 crowd from getting a credit card without proving sufficient independent income, no such requirements exist when it comes to co-signing loans for friends.
Has a friend ask you to co-sign a loan? Did you recently co-sign a student loan for a friend without understanding the consequences? Read on to make sure you’re fully informed about your options.
Should you co-sign for a friend?
If you found this article because a friend has asked you to co-sign, set aside their tale of woe for a moment and consider what they’re asking you to do: When you co-sign a loan, you are taking equal responsibility for it. If the primary borrower stops paying, you have to step in – or face the same consequences the primary borrower will (collection calls, credit damage and even lawsuits from the lender).
“One of the first things I say about student loans, is, ‘Don’t co-sign any student loans,’ ” says Randall Ryder, a Minneapolis-based attorney whose practice frequently handles cases involving student loans.
Of course, it’s your prerogative to co-sign, and the potential ramifications should be very clear in the loan paperwork.
“But it is such a bad position to be in,” Ryder says. “… There seems to be this misconception that it’s going to be fine, the person is going to make the payments, and everything will be OK. That’s obviously not always the case.”
So, you co-signed someone’s student loan. Can you get out of it?
The technical term you’re looking for is “co-signer release.”
Usually, the discussion of co-signing student loans centers around private loans, as, generally speaking, a co-signer won’t be required for federal loans. And the thing about private loans, Ryder says, is they’re all different. So, expect the terms for releasing you as the co-signer to be different, too.
“As for options for getting out of it, I’d start by looking at the terms and conditions,” Ryder says.
In general, the primary borrower must apply for co-signer release (the co-signer can’t apply). We did a quick survey of private loan providers and found the following assortment of co-signer release conditions:
- Wells Fargo: The most recent 24 consecutive monthly payments must be made on time. These consecutive payments must include the first payment. If the first payment is skipped, then 48 consecutive payments must be made on time for the co-signer to be released. The primary borrower must also undergo a credit and income evaluation.
- Citizens Bank: The primary borrower must make 36 months of consecutive on-time payments, undergo a credit evaluation and provide documentation showing sufficient income. If the application for co-signer release is denied, the borrower has to wait a full year to re-apply.
- Sallie Mae: The most recent 12 payments must be made on time, and the borrower must provide proof of graduation, pass a credit review, provide proof of income, have no other student loans in default and have no delinquencies of 90+ days in the past two years.
- Discover: No option for co-signer release, as of February 2012. Co-signers are responsible for the life of the loan.
You may have noticed a pattern in the above conditions: For lenders that provide co-signer release options, a long string (as in years) of on-time payments is required from the borrower, and that uninterrupted string sometimes must include the first payment. So, while you may have a way out, it’s not a surefire one.
“In a magical world we don’t live in, the primary borrower will always make all the payments,” Ryder says. “That probably happens, but I just never see that scenario. Nobody ever calls me to say, ‘Hey just wanted to check in and tell you I’m paying all my student loans.'”
Are there any other options? Ryder has seen some other co-signer release provisions that make exceptions for co-signers who become permanently disabled. You might also consider calling up the lender and asking if there are any other options for getting off the loan. They’re not obligated to offer you a way out if it’s not in the paperwork, and the option they give you might not be acceptable to you. For example, they say they’ll let you off if you pay the entire balance.
You could luck out, though – a lender might let you off if you agree to pay half of the balance or some other portion of it.
“What I always suggest is to call them 10 times because you’ll probably talk to 10 different people and get 10 different answers,” Ryder says. “The tenth person may give you the best option.”
What if the primary borrower is just never going to pay?
Pretty much all your options for getting off the loan involves the co-signer making payments for a certain length of time (see above). If your friend isn’t going to do that, your own options are extremely limited – and extremely specific to your situation. Ryder suggests consulting an attorney who is familiar with co-signing issues and student loans to walk you through all courses of action.
Among these possible options are:
- Taking over payments on the loan: You’ll be out the money, but your credit will survive. You might be backed into this corner if you’re trying to qualify for a car loan or mortgage in the near future.
“I have talked to people who have, purely out of the self-interest of protecting their credit, just decided to pay it,” Ryder says.
- Take the damage: If you’re going to attempt the head-in-the-sand approach (or the come-at-me approach if that’s more your style), keep in mind the lender is going to treat you like the primary borrower. When the loan goes into default, you’ll start getting collection calls. The delinquent loan will cast a pall over your credit for years. And the lender may decide to sue you.
“The really scary thing for the co-signer is that the lender isn’t required to sue both people,” Ryder says. “They may decide to just sue the co-signer.”
After all, the reason you were approved as a co-signer in the first place was that that lender found you more creditworthy than your friend.
“So the reason they might go after the co-signer is that they know the co-signer is the one who actually has the means to pay,” Ryder says.
- Go after your friend: Your friend has destroyed your credit, saddled you with thousands in debt and left you with no other choice than to start making payments with your own money. You should certainly try to encourage them to do the right thing. But getting any kind of compensation by suing isn’t likely, Ryder says.
“I suppose that’s an option, but I wouldn’t view that as a good option,” he says. “I’m not very optimistic that you have a very good chance for recovering that money from the primary borrower.”
If you can prove fraud (or that you were duped into co-signing), your chances at recovering damages may be better. However, the paperwork is usually pretty clear about your responsibility as co-signer, making this route difficult, Ryder says.
It all depends on your situation, though, and it might be worth pursuing some kind of recompense through the legal system.
“If you find yourself in a bad station, it is worth talking to an attorney who deals with this stuff somewhat regularly,” Ryder says. “The options may not be great, and they’re certainly not written in stone. But if you get in touch with an attorney who deals with this stuff, you might be able to minimize the damage.”