Ask Stacy: Is It Possible to Get Out of a Co-Signed Loan?

Photo by Marcos Mesa Sam Wordley / Shutterstock.com

Ever go out of your way to help someone by co-signing a loan or credit card, then live to regret it? That’s why we advise to avoid it all costs. But if you’ve already done it, is there a way to undo it? That’s the subject of this week’s question.

Dear Stacy,
I had to co-sign my daughter’s college loans. She is current with her payments, always has been, and there is no problem.

I have recently retired and would like to know if there is a way to get my name off of these loans?

Thank you. — Andrea

Here’s your answer, Andrea!

Getting away from co-signed debt

If a lender requires a co-signer, it’s generally because the borrower’s credit isn’t good enough to support the loan. It might seem logical that if the borrower’s credit improves during the life of the loan, or the borrower has proven trustworthy, the lender should agree to release the co-signer and look only to the borrower for repayment.

Unfortunately, however, that’s not typically the way it works.

The lender has everything to lose and nothing to gain by releasing the co-signer from a loan. After all, even if Andrea’s daughter now makes tons of money on her own and has a perfect credit score, there’s no guarantee she’ll remain that way. What if she becomes sick and can’t work? What if she dies?

The more people responsible for a debt, the less the risk to the lender. And if there’s one thing a lender loves, it’s less risk.

Fact is, once a lender has two potential sources of repayment on the hook, there’s little chance they’ll let either off. This is one reason why co-signing is a bad idea. It’s often permanent.

There is one possibility

You’ll note that the last sentence above said co-signing is “often” permanent. That’s because there are some loans that allow a co-signer to get off the hook, providing the borrower meets certain prearranged requirements. And one of the most common places you’ll find it is with student loans.

Andrea should call and ask the lender if her daughter’s loan contains a release provision, or better yet, sift through the loan documents herself. She should look for the words “co-signer release,” or “release provision.” If she finds them, she should see what the requirements are and if they’ve been met. For example, some lenders will release a co-signer when a required number of on-time payments have been made or the borrower builds a sufficient credit history and score.

If requirements have been met, she should contact the lender and get the ball rolling. Here’s a sample letter and more information from the Consumer Financial Protection Bureau. Definitely check it out.

Even if the loan documents don’t offer a co-signer release, check with the lender anyway. There’s no law against calling them and asking. The odds may not be good, but low odds are better than zero, and that’s what the odds will be if you don’t try. Also note that some lenders may allow for releases without disclosing that in their paperwork. So it’s always worth a call.

Same story with joint account holders

Many of the same rules that apply to co-signers also apply to joint account holders.

Say you combine your finances with the love of your life. You apply for a couple of credit cards together, or maybe combine your credit histories to qualify for a nice, fat mortgage.

Fast-forward a few years: Now you can’t stand the sight of each other. You each take a credit card, and your former love stays in the house, agreeing to faithfully pay the mortgage. Maybe you even have a divorce decree or other written document stating in black and white that the mortgage is now the responsibility of the person occupying the house.

Think any of this lets either party off the hook? Think again.

The lender doesn’t care who’s using which credit card, or who’s living in the house. They don’t care about agreements they’re not a party to, written or otherwise, saying who’s going to pay what. If you applied for a credit card or mortgage jointly, they can sue either or both of you to recover any losses. And absent a written agreement with them, that’s exactly what they’ll do.

Fair? If you’re the borrower, maybe you think not. But if you’re the lender, it’s perfectly fair. After all, when the cards and mortgage were applied for, both parties agreed to be responsible for the entire debt. It’s not your fault the co-borrowers now hate each other.

What can co-signers or joint account holders do?

In a word, refinance.

When you get divorced, the spouse keeping the house should pay off the existing joint mortgage by taking out a new one in his or her name alone. If that person doesn’t have the borrowing capacity, the only choice is to sell the house, pay off the loan and split the proceeds.

The same with credit cards: If you have plastic in joint names, the accounts should be closed and new, separate credit card accounts opened based on the credit of each individual.

It’s also true with co-signed loans. If Andrea’s daughter’s loans don’t allow for the release of the co-signer, the only way to eliminate Andrea’s liability is for her daughter to either pay off the loans or take out new loans in her own name to replace them. This can often be accomplished with a consolidation loan.

If Andrea’s daughter can’t refinance the debt with a consolidation or other loan, and there are no provisions to release the co-signer, then her mom will simply have to remain as a co-signer. And like all co-signers, Andrea needs to protect her good credit by setting up a system to make sure her daughter is making timely payments.

Do you have experience with co-signed loans? Share with us in comments below or on our Facebook page.

Got a question you’d like answered?

You can ask a question simply by hitting “reply” to our email newsletter. If you’re not subscribed, fix that right now by clicking here. The questions I’m likeliest to answer are those that will interest other readers. In other words, don’t ask for super-specific advice that applies only to you. And if I don’t get to your question, promise not to hate me. I do my best, but I get a lot more questions than I have time to answer.

About me

I founded Money Talks News in 1991. I’m a CPA, and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. If you’ve got some time to kill, you can learn more about me here.

Got more money questions? Browse lots more Ask Stacy answers here.

Disclosure: The information you read here is always objective. However, we sometimes receive compensation when you click links within our stories.

Read Next
7 Effortless Ways to Make Extra Money
7 Effortless Ways to Make Extra Money

In the digital age, new ways of earning cash crop up all the time — and some require next to no effort on your part.

15 Products You Need — Even If You Didn’t Know It
15 Products You Need — Even If You Didn’t Know It

Discover some must-have products on Amazon that you didn’t even know you were missing.

6 Reasons I Will Never Trust Suze Orman
6 Reasons I Will Never Trust Suze Orman

Beware: The self-proclaimed personal finance expert has a track record that suggests more sizzle than steak.

5 Ways to Get Amazon Prime for Free
5 Ways to Get Amazon Prime for Free

Hesitant to drop $119 a year on an Amazon Prime membership? Here’s how to get it for free.

Brace to Pay More for These 26 Prescriptions in 2020
Brace to Pay More for These 26 Prescriptions in 2020

More than 600 drugs — including these commonly prescribed meds — have seen price hikes so far this year.

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Most Popular
9 Things You’ll Never See at Costco Again
9 Things You’ll Never See at Costco Again

The warehouse store offers an enormous selection, but these products aren’t coming back.

11 Things Retirees Should Always Buy at Costco
11 Things Retirees Should Always Buy at Costco

This leader in bulk shopping is a great place to find discounts in the fixed-income years.

Over 50? The CDC Says You Need These 4 Vaccines
Over 50? The CDC Says You Need These 4 Vaccines

Fall is the time to schedule vaccines that can keep you healthy — and even save your life.

Why Cloth Masks May Increase Your Coronavirus Risk
Why Cloth Masks May Increase Your Coronavirus Risk

A new study finds that wearing a cloth mask can backfire if you don’t clean it properly.

11 Household Items That Go Bad — or Become Dangerous
11 Household Items That Go Bad — or Become Dangerous

When you get the impulse to stockpile these everyday items, pay close attention to their expiration dates.

8 Things You Can Get for Free at Pharmacies
8 Things You Can Get for Free at Pharmacies

In this age of higher-priced drugs and complex health care systems, a trip to the pharmacy can spark worry. Freebies sure do help.

The 15 Worst States for Retirees in 2020
The 15 Worst States for Retirees in 2020

Based on dozens of metrics tied to affordability, quality of life and health care, these are not ideal places to spend retirement.

7 Ways to Boost Your Credit Score Fast
7 Ways to Boost Your Credit Score Fast

Your financial security might soon depend upon the strength of your credit score.

These Are the 4 Best Medicare Advantage Plans for 2020
These Are the 4 Best Medicare Advantage Plans for 2020

Medicare Advantage customers themselves rate these plans highest.

This Is the Cheapest Place to Buy a Used Car
This Is the Cheapest Place to Buy a Used Car

Looking for a good deal on a set of wheels? This should be your first stop.

The 10 Most Commonly Stolen Vehicles in America
The 10 Most Commonly Stolen Vehicles in America

A new model parks atop the list of vehicles that thieves love to pilfer.

19 High-Paying Jobs You Can Get With a 2-Year Degree
19 High-Paying Jobs You Can Get With a 2-Year Degree

These jobs pay more than the typical job in the U.S. — and no bachelor’s degree is required.

5 Keys to Making Your Car Last for 200,000 Miles
5 Keys to Making Your Car Last for 200,000 Miles

Pushing your car to 200,000 miles — and beyond — can save you piles of cash. Here’s how to get there.

26 States That Do Not Tax Social Security Income
26 States That Do Not Tax Social Security Income

These states won’t tax any of your Social Security income — and in some cases, other types of retirement income.

3 Ways to Get Microsoft Office for Free
3 Ways to Get Microsoft Office for Free

With a little ingenuity, you can cut Office costs to zero.

10 Reasons Why You Should Actually Retire at 62
10 Reasons Why You Should Actually Retire at 62

If you can, here are several good reasons to retire earlier than we’re told to.

7 Surprising Features That Boost Your Home Value
7 Surprising Features That Boost Your Home Value

You can add value to your home without hiring a contractor to do expensive renovations.

5 Things That Make Life More Meaningful for Retirees
5 Things That Make Life More Meaningful for Retirees

Retirees agree: These are the things that give them purpose and fulfillment in their golden years.

15 Amazon Purchases That We Are Loving Right Now
15 Amazon Purchases That We Are Loving Right Now

These practical products make everyday life a little easier.

View More Articles

View this page without ads

Help us produce more money-saving articles and videos by subscribing to a membership.

Get Started

Add a Comment

Our Policy: We welcome relevant and respectful comments in order to foster healthy and informative discussions. All other comments may be removed. Comments with links are automatically held for moderation.