When a close friend or family member passes away, student loans are an afterthought. Unfortunately, a student loan cosigner dying can negatively affect the borrower, even if the borrower has never missed a payment.
The Big Danger: Auto-Default
An auto-default is a provision lenders sometimes write into student loan contracts (the promissory note). Under this provision, a lender can automatically place the loan into default status when a cosigner dies or declares bankruptcy. Lenders have used this provision to lay claims on the cosigner’s estate, even if the borrower never missed a payment.
Not surprisingly, many consumers found issues with this practice and filed complaints with the Consumer Financial Protection Bureau (CFPB). The CFPB shed some light on this industry practice. As a result, lenders like Sallie Mae and Wells Fargo promised to stop enforcing these provisions and to stop including them in new contracts.
Unfortunately, these provisions are still technically legal. As a result, some lenders may try to enforce or include them in their student loan contracts, 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. Additionally, borrowers can try to generate some negative publicity for their lender. Losing a loved one and having a lender act like a loan shark is a compelling story that 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, lenders cannot require borrowers to add a cosigner. Not every borrower has more than one cosigner available. The most a loan contract could do is require a borrower to seek out a cosigner. In the unlikely event that the loan contract requires the borrower to find a new cosigner, they should still never actually add a cosigner.
The conversation could go like this:
Borrower: The Bank requires me to 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 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: I will decline to cosign your loan.
Adding a cosigner after the death of the original cosigner will only benefit the lender and be to the detriment of the new cosigner. Unless you are facing an auto-default, 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 not telling the lender and hoping that the lender doesn’t find out about the cosigner’s death.
Here again, there is no benefit to the borrower to inform the lender of the death. The only reason a borrower should even consider this disclosure is if the loan contract explicitly requires it. The odds of such a clause being included and enforceable are low.
Avoiding These Issues
The best way to avoid any cosigner issues is never to have a cosigner.
If you already have a cosigner on the loan, you should explore getting them removed from the loan. There are a couple of different strategies that a borrower can use to release the cosigner from the loan.
Make a Plan for a Cosigner ReleaseRemoving a cosigner from the loan can greatly benefit both the borrower and the cosigner. Learn about how the process works and the different ways to get the cosigner removed from the loan.
Additionally, borrowers and cosigners should seriously consider life insurance. Depending upon the loan terms, an inexpensive life insurance policy could provide the necessary protection.
Bottom Line: Don’t Let Student Loan Lenders Take Advantage of Your Greif
The passing of a cosigner shouldn’t have an impact on the borrower of a student loan. Unfortunately, some lenders have been known to engage in some shady tactics 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.