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 Release: Removing 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.

The post My Cosigner Died… What Happens to My Student Loan? appeared first on The Student Loan Sherpa.

I’ll also cover one shortcut that can eliminate the need for a policy.

The good news is that a little bit of planning can prevent a variety of student loan nightmares.

If the Borrower Dies: The Worse Case Scenario

The purpose of a student loan cosigner is to have a second person legally responsible for the student debt.

If the borrower doesn’t find a job or can’t make payments, the student loan bill becomes the cosigner’s responsibility.

When cosigners add their name to a loan, they often consider what they will do if the borrower falls behind. Cosigners usually have a close relationship with the borrower, and most feel confident that if a borrower struggles, it will be a temporary issue.

Unfortuantely, many cosigners don’t consider what happens if the borrower dies. In the eyes of some lenders, nothing changes. If the borrower is deceased, they cannot make payments, and repayment becomes the cosigner’s responsibility. President Joe Biden ran into this very issue when his son died.

This particular term varies from one lender to the next. When a lender holds the cosigner responsible for the debt, the consequences can be devastating.

In some cases, the cosigner becomes responsible for the monthly payments. In other cases, the full balance of the loan is due.

Important Note About Federal Loans: This particular issue does not apply to federal student loans. Federal loans do not have cosigners. Additionally, when the borrower dies, the remaining federal loan balance is forgiven.

If the Borrower Dies: The Second Worst Case Scenario

Suppose the borrower dies and the lender forgives the debt.

The loan contract may specify that the debt is forgiven if the borrower dies, or the lender may choose to cancel the debt. Both options are better than getting stuck with the bill.

Unfortunately, the cosigner may still have financial issues. The IRS may treat the forgiven debt as taxable income. Meaning if $100,000 gets forgiven, the cosigner is taxed as though they earned an extra $100k that year.

Recently, Congress passed temporary legislation to protect families from tax bills when student loan borrowers die. However, even with the new law, it is challenging to navigate the taxability of canceled debt.

Here again, family members can face massive tax bills if a loved one dies unexpectedly.

If the Cosigner Dies

The death of the primary borrower is not the only concern.

Some private student loans have provisions that make the entire student loan balance due in full if the cosigner dies. A study from the Consumer Financial Protection Bureau found that many private student loans had “Auto Default” provisions. An “Auto Default” provision may be triggered even if the borrower has been in repayment and not missed a single payment.

Life Insurance: Protection from the Unexpected

Most healthy young people don’t spend much time considering the possibility of their death.

A recent study found that 73% of borrowers don’t know what happens to their debt if they die.

Life insurance solves this potential problem for student loan borrowers and cosigners. For young and healthy borrowers, setting up a policy can be inexpensive and easy. If tragedy strikes, a life insurance policy protects the family left behind.

Who Should Pay for the Life Insurance Policy?

Ideally, there should be two policies—one to protect the borrower and one to protect the cosigner.

I’m of the opinion that the borrower should pay for both policies. Cosigners take on a tremendous amount of risk by signing for a student loan, and they gain nothing in return. A life insurance policy protects the cosigner. It is also an excellent way for borrowers to show gratitude for cosigning.

However, borrowers may not be in a position to afford a policy. They may choose not to get one. In that instance, it is the responsibility of the cosigner to protect their own interests and take out a policy. And yes, it is possible to take out a life insurance policy on someone else.

A Cheap and Safe Way to Skip the Life Insurance Option for Student Loan Cosigners

Most of the problems described in this article disappear if the cosigner is removed from the loan.

Many lenders offer cosigner release policies, but qualifying is difficult. Fortunately, there are several different ways to remove a cosigner from the loan. If the pursuit of a cosigner release is successful, borrowers and their cosigners are protected, and no life insurance is required.

The post When Student Loan Borrowers and Their Cosigners Need Life Insurance appeared first on The Student Loan Sherpa.