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What Happens When a Student Loan Cosigner Dies?

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In the sad event that your student loan cosigner dies, you may have to take steps to protect your finances and credit. While your student loans might not be impacted, it is possible that they could go into automatic default in the event of a student loan cosigner death.

While dealing with student loan debt is probably the last thing you want to think about as you grieve, there are some important financial ramifications to consider as a borrower.

What to do if your student loan cosigner dies

Here are three steps you can take to 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 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. (Help is available if you need to track down your student loan servicer.)

Once you find your documents, look for anything that mentions student loan cosigner deaths. In many cases, you will find that things remain the same if your cosigner dies. As long as you never miss a payment or come up short, nothing much changes.

However, some private lenders have a clause in their contracts where the loan balance is due immediately even if your loan is current and you’ve been making on-time payments. This is known as an automatic default, which is a huge blow to your finances and credit, especially if you don’t have the means to pay off the balance right away.

If you have an automatic default provision, look to refinance the loans immediately (more on this later). Or, if a cosigner is terminally ill, look into this information ahead of time. It may be necessary for you to make changes to your loan before the student loan cosigner dies.

While most major lenders no longer practice this policy of automatic default, there may still be a few lenders who do, so it’s worth investigating.

Inform your lender if required

When looking over your student loan documentation, find out if you have to inform your lender in the event of student loan cosigner death. According to student loan lawyer Adam Minsky, this requirement would be called an “affirmative disclosure obligation.”

“[It] would depend on the specific language in the promissory note and whether there is an affirmative disclosure obligation,” said Minsky.

In his experience, however, this type of 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,” Minsky added.

However, 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 and asking them to do so. But if there wouldn’t be a benefit to contacting your lender, you might be better off keeping this information to yourself.

Consider refinancing your student loan

If you are facing an automatic default when your student loan cosigner dies, look into moving your loan to another lender before the default kicks in. While refinancing can take some time, you may be able to push it through quickly; just make sure you’re not moving to a loan with a higher interest rate.

If you can, try to refinance without another cosigner. If you have been making on-time payments each month, your credit score has likely improved, which will help you when refinancing.

When you refinance, your old loan is paid off and replaced with a new loan from a new lender. You may sign away certain benefits, but if it can help you avoid a default, it could be worthwhile.

What happens to your cosigner if you die?

Let’s flip the perspective: What happens to your student loans if you die and you had a cosigner?

If you have federal student loans, the loans are discharged — and no one owes another dime. Although student loans are notoriously difficult to discharge through bankruptcy or other means, federal student loans are discharged upon the death of a student loan borrower.

Private student loans are another story. Some private student loan lenders, such as Sallie Mae, do discharge a 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 you die.

If you are married and have private student loans, the lender could go after your spouse for the remaining balance. However, that is typically the case if you took on the loans after you were already married and you live in a community property state.

Protecting yourself amid tragedy if your cosigner passes away

It is horrible to have to go through the death of someone you care about. Unfortunately, the financial fallout can make a tough situation worse, especially if your student loans automatically go into default. To protect your financial future, follow the steps discussed above. By taking charge, you can avoid the burden of defaulted student loans.

 

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