A Debt Relief Firm Told You to Stop Paying Your Sallie Mae Loan? Your Cosigner Pays for That.

If someone told you to stop paying your private student loan so they could “negotiate it down,” you aren’t the only one. Sallie Mae just told its investors that this advice is now a line item on its income statement.

And if a parent cosigned that loan, they’re in it with you.

What Sallie Mae put in writing

On October 22, Sallie Mae reported $90 million in third-quarter net charge-offs, up from $78 million a year earlier. A charge-off is the lender writing a loan off as lost. Its earnings release blames the jump mainly on “misaligned third-party debt resolution practices” hitting “a small, high-ability-to-pay segment of borrowers progressing straight through delinquency to default.”

Translation: people who could afford their payments stopped making them on outside advice. TIKR’s write-up of the results puts it plainly: for-profit debt resolution firms are “telling borrowers with good credit to stop paying, so the firms can negotiate a settlement.”

The damage was big enough that Sallie Mae raised its full-year charge-off forecast to $400 million to $420 million, from $365 million to $385 million. On the earnings call, CEO Jon Witter said an AI review of its collection calls found a 50% drop this month in borrowers mentioning “relevant players and practices.” So the pitch is still out there. It’s just quieter.

Here’s the detail that should worry families. Sallie Mae says 92% of its new loans this quarter came with a cosigner.

What “stop paying” really costs

Sallie Mae’s own warning page lays out the sequence. You stop paying, and interest and fees keep piling up. The account goes to collections, and the lender may sue. Once the loan defaults, the full balance can come due at once. Your credit takes the hit, and so does your cosigner’s, for up to seven years. And lenders aren’t required to deal with these firms at all.

Now run a $40,000 loan through the best case. Say the firm lands a $24,000 payoff. That’s a generous made-up number, and nothing promises it. Sallie Mae says these companies can charge up to 25% of your total debt, which is another $10,000. The IRS generally treats the $16,000 that was forgiven as income. In the 22% bracket, that’s $3,520 in federal tax.

Total: $37,520 to clear a $40,000 loan. You save about $2,500, and in exchange you get two wrecked credit reports and a lawsuit risk. That’s dumb math, even when everything goes right.

The move

Call Sallie Mae before you miss a payment, not after. Its quarterly filing describes hardship forbearance and rate modifications as tools it uses with struggling borrowers, and its warning page says it won’t charge you fees to talk. Ask for both by name.

If a firm already has you enrolled, check what you’ve paid. The FTC’s Telemarketing Sales Rule bans debt relief companies that sell by phone, including when you called a number from an ad, from charging anything until they’ve settled at least one debt, you’ve agreed to the deal, and you’ve made a payment to the creditor. If they took money up front, that’s your opening to cancel and demand it back.

Then tell your cosigner. They’d rather hear it from you than from a collector.

For the rest of the playbook on debt settlement, read what the ads leave out. If your problem is really the monthly payment, a nonprofit debt management plan is the cheaper route. More borrowing guides live on our education hub.

The detail

Sallie Mae’s 10-Q says it paused most of its third-party recovery work while it builds what it calls a “more effective, customer-aligned approach.” Delinquencies hit 4.2% of loans in repayment on September 30, up from 4.0% a year earlier. The company also says part of that rise comes from portfolio changes, not only from the debt resolution firms.

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