My dad wants to take out a mortgage and has tried, unsuccessfully, to have Sallie Mae release him as cosigner on my $153,000 student loan. What can we do?

My dad is trying to buy a new house, and Sallie Mae will not take him off the loan even though they said he only had to remain as the cosigner for the first 12 months after I had to start making payments. Sallie Mae never gave us any documentation stating this. This student loan is preventing him from acquiring a mortgage loan. What are our and his options?

Former Student and Worried Son

Also see: My sister owns properties in Hawaii, yet refuses to make a will. If she dies, will our half-sibling inherit anything?

Dear Former Student,

Unfortunately, the one thing Sallie Mae
SLM,
+0.70%
won’t take into account when deciding whether to remove your father as a cosigner on your student loan is his desire to take out a mortgage.

Borrowers who default on their student-loan debt can face years of harsh penalties: They could have deductions on their tax refunds, and even have their Social Security benefits and wages garnished to repay the student loan. The Consumer Financial Protection Bureau has a guide for cosigners, and also points to research that says at least a quarter of cosigners end up making at least one student-loan repayment. Why am I telling you all of this? Because lenders will take a cosigner off the loan when all its conditions have been met.

Cosigning 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 it’s not somebody’s child or parent. In fact, one-third of the defaulted student loans are held by borrowers who are aged at least 50, even though older borrowers make up around 20% of federal student loan borrowers, according to recent data. Only 10% of cosigner release applications are approved, the CFPB found in another study, so your father is not alone in his quest to have himself removed.

I reached out to Sallie Mae about your letter, as a courtesy and to see if they could provide further insight, and a spokesman told me that it only offers private student loans and provides multiple disclosures to customers stating that during the application process. It also cited its policy related to cosigner release, which states that “you can apply to release your cosigner from an open and active loan after you graduate or complete your certificate, make 12 on-time principal and interest payments, and meet certain credit requirements.”

Sallie Mae has not issued federal loans since June 30, 2010, the company confirmed, and nor are they a servicer of federal student loans. Mark Kantrowitz, the author of “How to Appeal for More College Financial Aid” and “Who Graduates from College? Who Doesn’t?” says those attempting to remove a cosigner can stack the deck more in their favor if they ensure that they’re processing their repayments and requests correctly. I’m not saying you’re doing it wrong, but I am saying it’s a very complex process.

Make sure you put the correct loan I.D. number on your checks so they don’t get applied to the wrong account, he says. “There’s also the issue of payment application order, where payments are applied first to accrued but unpaid interest, not principal, and borrowers think they can insist on the payments being applied to principal. Even federal loans apply payments first to interest, and borrowers have no choice in the matter. They also don’t realize that, if interest is capitalized, there is no difference between payments being applied to interest or principal.”

“Finally, cosigner release options are not part of the promissory note, so they are entirely at the discretion of the lender,” Kantrowitz says. “In particular, all lenders who offer cosigner release want to see the payments being made by the borrower, not the cosigner. After all, as soon as the cosigner is released from the loan, the cosigner’s checks stop, and the borrower defaults. The lenders want to be sure that the borrower is capable of making the payments on the debt. So, they do track the source of the payments.”

There are — in theory — ways for less-than-honest borrowers to “game” the system. “If a cosigner wants to be sneaky, they could make the payments to the borrower, who would then make the payments to the lender, and the lender would be none the wiser,” he says. “But, lenders also check income, debt-to-income levels, duration of employment, payment history and credit scores, before releasing a cosigner from the loan. If the borrower fails any of these criteria, the cosigner release is not approved.”

You want to avoid a situation where you are in default, and your dad has to bail you out, or you are in default and you no longer have him as cosigner. As my colleague Jillian Berman has reported, consumer advocates and borrowers have long complained that that approach to student-debt collection can be overly punitive and push borrowers into even more severe financial distress. My advice — both financial and ethical — is boring. Follow the rules. Cross your “t”s and dot your “i”s and your father will be released as a cosigner from your student loan when it’s in the best interest of all three parties: You, your dad, 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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