When a close friend or family member passes away, student loans are an afterthought. Unfortunately, the death of a loved one who cosigned a student loan can have negative consequences on the borrower, even if the borrower has never missed a payment.
The good news is that these issues are becoming increasingly rare due to media and government attention on these unfair practices. While some concerns do remain, most borrowers should not run into issues in the event a cosigner dies.
The Big Danger: Auto-Default
An auto-default is a provision written into some student loan contracts that causes the loan to automatically be placed into default status in the event that a cosigner dies or declares bankruptcy. This provision was used by lenders to go after the estate of the cosigner, even if the borrower had never missed a payment on their loans.
Not surprisingly, a number of consumers found issues with this practice and filed complaints with the Consumer Financial Protection Bureau. The CFPB shed some light on this industry practice, and as a result lenders like Sallie Mae and Wells Fargo promised to stop enforcing these provisions and to no longer include them in new contracts.
The bad news is that these provisions are still technically legal, so some lenders may try to do so, despite the negative publicity it could generate. For borrowers, one of the better defenses against this practice is to file a complaint with the CFPB and to try and generate some negative publicity for your lender. Loosing a loved one and having a lender start acting like a loan shark is a compelling story that many in the media may want to tell.
Don’t Add Another Cosigner
We have heard from readers who were told by their lender that they needed to find a new cosigner. Despite what the lender may claim, there is no way they can force the addition of another cosigner to the loan.
For a borrower to willingly add a cosigner and get nothing in return from the lender would be a huge mistake. For starters, unless it is written into the loan contract, the lender cannot require it. Secondly, even in the highly unlikely event that the borrower was required by the loan contract to seek out a cosigner, they should still never actually add a cosigner.
The conversation could go like this:
Borrower: The Bank requires me to make an attempt to find a new cosigner because grandma died.
Parent: Do I have to cosign for you?
Borrower: No. It is your decision. You cosigning wouldn’t actually help me in any way, but it would make you legally responsible for the loan. The only one who benefits is the bank. I’m just fulfilling my requirement to ask.
Parent: Then I will decline to cosign your loan.
Adding a cosigner after the death of the original cosigner is something that will only benefit the lender and be to the detriment of the new cosigner. There is no reason to do it.
Do I have to tell the lender?
One of the best ways to avoid any deceased cosigner issues is to not tell the lender and to hope that the lender doesn’t find out of the passing.
Here again, there is no benefit to the borrower to inform the lender of the death. The only reason that a borrower should even consider this disclosure is if it is explicitly required in the loan contract, and the odds of such a clause being included and enforceable are low.
Avoiding These Issues
The best way to avoid any cosigner issues is to never have a cosigner.
If you already have a cosigner on the loan, refinancing may be a way to get your cosigner removed. In a student loan refinance, a new lender pays off the old loan in full and the borrower has to repay a new loan to the new lender. The goal is to find a company that will refinance at a lower interest rate. This can be a very effective approach for borrowers with solid income and credit scores.
The passing of a cosigner shouldn’t have an impact on the borrower of a student loan. Unfortunately, some lenders have been know to engage in some shady tactics to try to make a few extra bucks. The good news is that for most borrowers this is a non-existent problem, or one with an easy fix.