What Happens When a Student Loan Cosigner Dies?
A cosigner assumes legal responsibility to pay a debt if the primary borrower can’t make payments. But what happens if a cosigner on a student loan dies?
Dealing with financial logistics while grieving is probably the last thing you want to do. However, there are some critical factors to consider if your cosigner passes away, such as the possibility that your student loans could go into automatic default.
What to do if your student loan cosigner dies
While your student loans might not be affected, a sudden default is a possibility. The following three steps can help ensure your student loans remain in good standing:
Review your student loan documentation
Your first step is to dig out your student loan documents so you can review the legal implications in the event of a student loan cosigner death. If you can’t find the documents, log in to your lender’s website to see if you can find documentation there. (Check out our guide to tracking down your student loan servicer if you need help.)
Once you find your documents, look for anything that mentions student loan cosigner deaths. In many cases, things will remain the same despite the death of a cosigner, as long as you keep up with on-time payments.
However, some private lenders require the total balance to be paid immediately after a cosigner passes away, even if you’ve been keeping up with the monthly payments on your own. This is known as an automatic default clause, which can be a huge blow to your finances and credit, especially if you don’t have the means to pay the entire balance immediately.
What is auto default?
An automatic default policy is sometimes included in student loan agreements and will put your loans into default if your cosigner dies. This happens automatically, regardless of your payment history or current financial status.
Once in default, the lender can go after you for repayment and may even attempt to collect from the cosigner’s estate. Unless you can pay the debt in full, this default will likely impact your credit score and make it challenging to secure credit cards, car loans or mortgages down the road.
If you have an automatic default provision, you could look to refinance the loans immediately (more on this later).
Or, if a cosigner is terminally ill, you might want to look into this information ahead of time. You may need to make changes to your loan while the student loan cosigner is alive, such as applying for cosigner release.
While most major lenders no longer implement an automatic default policy, it’s still important to thoroughly read your student loan agreement to be aware of those few who still do.
Inform your lender if required
When reviewing your student loan documentation, make sure to find out if you must inform your lender in the case of student loan cosigner death. As student loan lawyer Adam Minsky explains, this requirement is known as an “affirmative disclosure obligation.”
“[It] would depend on the specific language in the promissory note and whether there is an affirmative disclosure obligation,” Minsky says.
But, he adds, this type of disclosure requirement is rare: “I don’t recall having seen language requiring an affirmative disclosure of this type, and I have not encountered a default related to a failure to disclose.”
Still, it’s worth looking into just in case your lender has outlined steps you must take to remain in good standing. According to the Consumer Financial Protection Bureau (CFPB), some banks scan public death records, automatically matching names and placing loans into default.
If your lender can remove your cosigner’s name from the account and list you as the sole responsible party, it could be worth informing them about the situation.
But otherwise, if there’s no clear benefit to contacting your lender, then you might be better off keeping this information to yourself.
Consider refinancing your student loan
If you are facing an automatic default after the death of a cosigner, you should think about moving your loan to another lender before the default kicks in. While student loan refinancing can take some time, you may be able to push it through quickly — just try to avoid moving to a loan with a higher interest rate.
When you refinance, your old student loan debt is paid off and replaced with a new loan from a new lender. In some cases, you may lose certain benefits you had with your previous lender, but it could be worthwhile if it helps you avoid a default.
Note that if you have a good credit score, you could try to refinance without another cosigner by meeting the lender’s income requirements and continuing to make on-time payments each month.
What happens if the student loan borrower dies?
Let’s flip the perspective: What happens when the primary borrower dies, and you are a cosigner?
For federal student loans, this won’t be an issue, because these loans don’t use cosigners, and all debt is automatically discharged upon the student’s death. This death discharge also applies to a Parent PLUS Loan if either the student or parent passes away.
Although student loans are notoriously difficult to discharge through bankruptcy or other means, this federal debt will disappear upon the borrower’s death.
Private student loans are another story. Some private student loan lenders, such as Sallie Mae, discharge the loan after the borrower dies. Others, however, will try to claim the remaining balance from an unmarried borrower’s estate. This can affect life insurance, inheritance and other financial transactions after death.
If you’re married and have private student loans, the lender could go after your spouse for the remaining balance. However, that is typically only the case if you took on the loans after being married, and you are living in a community property state.
If you still have questions about cosigner or student loan death, you might consider speaking with a certified student loan counselor. It’s better to understand your options now than to have to deal with it after losing a loved one.