The death of a cosigner can have serious implications on a consigned student loan, even if you’re current with the payments.
The bottom line first
If you have a cosigner on a private student loan, you could be faced with an unwelcome surprise if they pass away. That’s because many loan contracts with a cosigner include a clause about what happens if they die. In some cases, the contract states that the loan will automatically go into default if the cosigner passes away.
This can have a serious impact on any private student loans. The good news is that many lenders have voluntarily eased their rules on auto-default The bad news is that it’s not federal law, so you might have a lender that still uses this practice. This is also important to consider if you’re going to have someone cosign for you.
Here are two questions Debt.com has received related to what happens if a student loan cosigner dies. Andrew Pentis from Student Loan Hero provides a great explanation of what to do if you’re already in this situation. Then I explain why you want to avoid it ahead of time and options you can consider instead.
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What to do when a student loan cosigner dies
Question: My mother cosigned a student loan for my daughter. She has been deceased for two years. My daughter hasn’t paid her student loans due to financial issues. I just got a debt collection notice from court in the mail with my mom’s name on it. How can we handle this? – Karen B. in Medford, MA
Andrew Pentis, personal finance expert and certified student loan counselor at Student Loan Hero, responds…
Up until 2016, major banks immediately placed a borrower’s student loan in default when learning of a cosigner’s death. Thanks to the Consumer Financial Protection Bureau’s efforts, that “automatic default” practice is mostly obsolete.
Ten lenders who offer private student loans agreed to stop the practice of auto-default, including:
- Wells Fargo
- PNC Bank
- Sallie Mae
Of course, not all lenders have voluntarily agreed to adopt this policy. So, depending on your lender, auto-default may still be written into your loan contract.
Outside of that however, it sounds like your daughter’s loan was already headed for default before the passing of your mother.
Although it should be easy to remove your mother from the loan — and stop those debt collection letters from being addressed in her name — your daughter will still need come up with an answer for repayment.
Removing a cosigner from a student loan if they pass away
As a cosigner, your mother was as legally responsible for repaying the loan as your daughter, the primary borrower. Private lenders, however, will often now remove the cosigner from the loan agreement upon their death. That would mean your daughter should have been solely responsible for repayment since her grandmother’s passing. She shouldn’t have to recruit a new cosigner in all likelihood.
If your daughter’s lender and collection agency weren’t informed of your mother’s death, however, that would explain why it sent a debt collection notice in her name.
Before taking any other measures, your daughter should review her student loan agreement. There could be language in her promissory note specific to cases of cosigner death.
In rare cases with smaller, less-scrupulous lenders, a cosigner’s passing could still trigger an auto-default. That means that the balance would be due in full and that the lending bank could file suit to collect it. If the legalese trips up your daughter and her lender is unhelpful, you could seek the assistance of a student loan counselor or lawyer.
After reviewing her loan details, your daughter could inform her lender that her cosigner has passed away. This will remove your mother’s name from the debt. Your daughter might have to provide a death certificate or other proof to stop future debt collection letters.
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Handling loan repayment when a cosigner dies
Even without her grandmother acting as her cosigner, your daughter will still have to handle repayment. She’ll want to get a move on because private student loan default carries serious consequences, including wrecked credit and, potentially, wage garnishment.
Again, your daughter contacting her lender is a smart first step.
Work out a repayment plan with the lender
If the debt has already been placed with a collection agency, your daughter’s options might be limited. Still, it’s worth reaching out to her bank, credit union, or online lender and expressing her desire to get back on track.
In some cases, private lenders offer a respite to borrowers who are experiencing economic hardship. SoFi, for example, offers distressed borrowers an income-based repayment program that caps monthly payments at a percentage of the borrower’s income. It’s similar to the income-based repayment plan for federal loans. The trade-off is that a longer repayment is a more expensive repayment, due to accruing interest.
Refinance the student loan with a new lender
If your daughter’s lender is past the point of offering support, she might look to refinance the loan with a new private lender. Through student loan refinancing, your daughter may be able to reduce her monthly payment to a more manageable amount. She would also be free to select a lender offering greater repayment protections, including forbearance, in case her financial issues continue.
To qualify for refinancing, however, your daughter would likely need a new cosigner. It’s almost certain that her defaulted loan has harmed her credit score, which is key to refinancing eligibility.
Find a loan to fit your needs.
Negotiate a settlement with the collection agency
If despite her financial issues, your daughter has some cash on hand, she could engage her lender’s collection agency in settlement negotiations. An early payoff or a modified repayment plan could be brokered. Just be sure to keep a record of all correspondence, as the paper trail could protect your family down the road.
There is no perfect solution to a defaulted debt, particularly in cases of cosigner death.
Beyond the emotional toll, losing a loved one often comes with financial headaches too. Fortunately, there are ways forward for your daughter.
Options to consider before a student loan cosigner
Question: I’m going for a master’s degree, but I’ve maxed out all my public student loans. I got all the scholarships I’m gonna get. I already work two part-time jobs. So, I need a private student loan. But it’s the same old Catch 22: I don’t have enough money to get a bank to give me money.
My aunt was just diagnosed with cancer, and it’s bad. She’s got maybe a year. She jokingly said she’d co-sign a loan for me, and good luck collecting from her if I can’t pay it back. (Which I probably can’t.)
This sounds like a great loophole. What do you think, Howard?
— Paul in Oklahoma
Howard Dvorkin CPA answers…
What do I think? First, I extend my sympathy to your aunt. Second, you said your aunt was joking. I tend to agree that it’s a better laugh than a plan.
Here’s the problem: When your aunt dies, the loan doesn’t.
You seem to be aware that you’ll be responsible for the payments, Paul. What you may not know is this, according to student loan expert Heather Jarvis…
The death of the borrower or the cosigner can trigger a default. That means the entire balance becomes due immediately, even if the surviving signer has always made payments on time.
While the CFPB ruling in 2016 got some lenders to agree to stop this practice, it’s not law. So, depending on the lender, there may be an auto-default clause written into the loan contract.
What’s more, even if the contract doesn’t include the auto-default clause, the holder of the loan could go after your aunt’s estate. If she planned to leave money for you or her other relatives, there may be little or nothing left. You don’t want to drain your own inheritance just to finish your degree.
In the short term, your aunt’s joke is a good way to get a loan you wouldn’t otherwise qualify for. But in the long run, it may not be worth it. So, what else can you do?
How to avoid needing a consigner as you finish your education
I’ve counseled people in your position before and the advice usually comes down to this: Consider delaying your education.
Look for a full-time job with the highest annual salary you can find
You already have a bachelor’s degree, so find a full-time job and save money before returning to graduate school. Many educational, as well as financial experts, believe this not only helps you save money, it helps you mature.
Of course, once you start working, you’ll soon start getting billed for your federal student loans. Hopefully, you find a job where you earn enough annually to comfortably afford your student loan payments, as well as leaving money to save to pay for your master’s degree.
Consider refinancing once you have the income to do so
You indicated that a lack of income was the reason you were turned down for private student loans. So, assuming that your credit score is high enough to qualify, you should be able to get a private loan to refinance once you start earning an annual income. Depending on your credit score, this could significantly lower the interest rate applied to your current debt. That would make it easier to pay it off faster.
Just be aware that if you convert federal student loan debt to private, you would no longer be eligible for federal student loan relief. This includes income-driven repayment plans, as well as student loan forgiveness. However, while these programs reduce the monthly cost burden of student loans, they can extend the repayment period up to 25 years.
Since you’re trying to get out of debt faster so you can go back to finish your masters, you’ll want to get out of debt as quickly as possible.
Find an employer that offers tuition assistance
Another great option is to find an employer that provides a tuition assistance program. This basically means that the employer will be willing to fund your education up to a certain amount each year.
This would allow you to finish your degree while you work. You can pay down your existing loans with your paychecks and finish your master’s degree with the tuition assistance you receive. It may take longer to get through school, but you’ll leave without the burden of more debt.
Find the right loan to consolidate your debt.
Published by Debt.com, LLC