A reader wants to know what do to with collection notices addressed to her mother now that she’s passed away.
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.
Unfortunately, Karen, 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 have to come up with an answer for repayment.
Removing a deceased cosigner from a private student loan
As a cosigner, your mother was as legally responsible for repaying the loan as your daughter, the primary borrower. Private lenders, however, will often 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.
Talk to a student loan debt resolution specialist to find the best way to get out of debt for your needs.
Handling loan repayment when a cosigner passes away
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.
See if you qualify to refinance your student loans in just 2 minutes.
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.
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.
Published by Debt.com, LLC