Lori Meadows
A cosigner is someone who signs a student loan to guarantee to the lender that the debt will be repaid. If the primary borrower can't pay, then it's up to the cosigner to do so. But what happens if the student, who is the primary borrower, dies? While federal student loans are discharged upon the borrower's death, private student loans do not have to offer the same protection. In the case of a private student loan, the lender will still seek payment from the borrower's estate, and if the estate is unable to pay off the debt, the cosigner may be held responsible for repaying the remaining debt. Some private student loans also include an automatic default clause, which means that the loan will go into default if the cosigner dies, regardless of the payment history or current financial status. However, these clauses are becoming rarer.
| Characteristics | Values |
|---|---|
| Does a cosigner have to pay if the student dies? | It depends on the loan agreement. Some private lenders require the total balance to be paid immediately after a cosigner passes away, even if the borrower has been keeping up with the monthly payments. This is known as an automatic default clause. |
| What happens if the primary borrower dies with a cosigner on the policy? | The cosigner will likely have to pay back the debt. |
| What should one do if the cosigner dies? | Review the terms of the loan. Some private student loans require notification of death. Contact the lender to ask about the process for getting a cosigner release. |
| What happens if a student loan borrower dies? | For federal student loans, the entire balance of the loan will be canceled once the loan servicer has received a death certificate verifying the death of the borrower. Private student loans do not have to offer the same kind of protection. |
| What happens if a cosigner on a federal student loan dies? | Federal student loans do not require cosigners, so if the loan is federal, the borrower is in the clear. |
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What You'll Learn
The cosigner's liability
A cosigner is someone who signs a student loan to guarantee to the lender that the debt will be repaid. They are liable for student loan repayment—including any late fees—if the primary borrower is unable to make payments. In the event of the primary borrower's death, the cosigner may be responsible for the remaining debt. This is more likely if the estate of the deceased borrower is unable to pay off the debt.
If a cosigner dies, the primary borrower is still responsible for repaying the loan. The loan agreement may include an automatic default clause, which means the loan will go into default if the cosigner dies, even if the borrower has been keeping up with monthly payments. However, this is becoming less common due to pressure from the Consumer Financial Protection Bureau. If the loan does not have an automatic default clause, the borrower can continue paying back the loan as before.
In the case of federal student loans, the debt is automatically discharged upon the student's death, so a cosigner would not be responsible for repayment in this case. However, there may be a tax liability associated with discharging a federal student loan if the borrower died prior to January 1, 2018. For private student loans, the lender may or may not offer the same kind of protection. Some private lenders require the total balance to be paid immediately after a cosigner passes away, while others may simply remove the cosigner and allow the borrower to continue making payments.
If a cosigner dies, it is important to review the terms of the loan and communicate with the lender to understand your options and responsibilities. Refinancing the loan with a new lender or consolidating it into a Direct Consolidation Loan may be possible options to remove the deceased cosigner.
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Automatic default clauses
An automatic default clause in a student loan agreement means that the remaining balance comes immediately due in full if the co-signer passes away or files for bankruptcy, even if the loan was in good standing. This is sometimes referred to as a "whole loan due" clause. This can be a huge blow to the finances of the primary borrower, especially if they do not have the means to pay the entire balance immediately.
In the event of the death of a co-signer, the loan may be put into default, and the lender can go after the primary borrower for repayment. The lender may even attempt to collect from the co-signer's estate. This default will likely impact the borrower's credit score, making it challenging to secure credit cards, car loans, or mortgages in the future.
It is important to note that federal student loans in the U.S. rarely require a co-signer, except in certain cases, such as when the borrower has a poor credit history. In the case of the death of the primary borrower with a co-signer, federal student loans are discharged, and the debt is automatically forgiven.
To avoid potential issues with automatic default clauses, it is recommended to review the terms of the loan agreement carefully before signing. If the loan already includes an automatic default clause, refinancing with another lender or finding a private lender that offers a co-signer release option may be considered.
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Loan refinancing
When a cosigner on a student loan dies, the primary borrower becomes responsible for the debt. The death of a cosigner can trigger an automatic default clause in the loan terms, causing the loan to go into default even if the payments are still being made on time. However, these clauses are becoming rarer due to pressure from the Consumer Financial Protection Bureau. If the loan includes such a clause, it can negatively impact the borrower's credit score and make it more challenging to secure other loans or credit cards.
If the loan does not include an auto-default clause, the borrower can continue paying back the loan as usual. In this case, the only change is that the lender no longer has someone to reclaim the debt from if the borrower defaults.
To avoid the consequences of an auto-default clause, the borrower can consider refinancing with another lender before the default triggers. Refinancing involves taking out a new loan with a different lender to pay off the current loan, often at a lower interest rate. This can help the borrower save money over the life of the loan. When refinancing, it is important to shop for interest rates and compare the pros and cons of each lender to find the best option. The borrower may be able to refinance without another cosigner by meeting the lender's income requirements and continuing to make timely payments.
Additionally, the borrower can contact the loan servicer to inquire about a death discharge, which would remove the cosigner's liability from the loan. Some lenders, such as Sallie Mae and Wells Fargo, typically release the cosigner if they die and do not put the loan into default. It is also worth noting that federal student loans do not use cosigners, and the debt is automatically discharged upon the student's death.
In summary, the death of a cosigner on a student loan can have varying consequences depending on the loan terms. The borrower should review the loan agreement and consult the lender to understand their responsibilities and options, which may include refinancing with a new lender to avoid an automatic default.
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Death discharge
The death of a cosigner on a student loan can be a complicated situation, and the outcome depends on various factors, including the type of loan and the specific loan agreement. Here is some information on how death discharge applies in different scenarios.
Federal Student Loans:
Federal student loans do not require cosigners, so if the student borrower dies, the loan is automatically discharged. This applies to Direct Loans and Parent PLUS Loans. The loan servicer or the US Department of Education will require a copy of the death certificate to qualify for federal loan discharge. It is important to note that there may be tax liability associated with discharging a federal student loan if the borrower died before January 1, 2018, due to previous tax laws.
Private Student Loans:
Private student loans are different from federal loans in that they do not automatically discharge upon the borrower's death. The outcome depends on the specific lender and loan agreement. Some private lenders may require immediate repayment of the total balance after the cosigner's death, even if the borrower has been making regular payments. This is known as an automatic default clause, which can negatively affect the borrower's credit score and make it challenging to secure other forms of credit in the future. However, these clauses are becoming rarer due to pressure from the Consumer Financial Protection Bureau.
If there is no automatic default clause in the loan agreement, the borrower can continue paying back the loan as usual. The lender will remove the cosigner and may review the borrower's credit or reassess their eligibility, but calling the full loan due immediately is rare. Some lenders may offer a cosigner release option, allowing the borrower to remove the cosigner and continue with the loan.
To understand the specific implications, it is crucial to review the loan agreement and contact the lender directly. Each situation is unique, and proactive communication with the lender can help borrowers navigate their options and protect their credit during a difficult time.
Death of the Student Borrower:
If the primary borrower dies with a cosigner on the policy, the cosigner may be responsible for repaying the debt. This depends on the type of loan and the loan agreement. For federal loans, such as Grad PLUS Loans or Parent PLUS Loans, the loan is discharged upon the student's death, even if there is a cosigner. However, for private student loans, the cosigner may be held liable for the remaining debt if the borrower's estate cannot pay it off.
In summary, the death discharge of student loans depends on the type of loan and the specific loan agreement. Federal student loans are generally discharged upon the borrower's death, while private student loans vary depending on the lender's policies and the presence of an automatic default clause. In the case of a cosigner's death, proactive communication with the lender and understanding the loan agreement are crucial for managing the loan and protecting one's credit score.
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Cosigner release
If a student with a private student loan dies, the lender will likely charge the debt against the borrower's estate. This may also impact the cosigner, as some lenders may direct the responsibility for repaying the remaining debt to the cosigner if the estate is unable to pay it off. Per the Economic Growth, Regulatory Relief, and Consumer Protection Act, all new student loans taken out after November 20, 2018, are automatically eligible for cosigner release if the student borrower dies. For loans before November 20, 2018, cosigners should ask about the lender's release process if there is one.
Federal student loans are discharged when the borrower dies. This includes Parent PLUS loans, Grad PLUS loans, and Direct Consolidation Loans. In the case of Parent PLUS loans, the debt is discharged upon the death of either the parent or the student on whose behalf the loan was taken out.
Some private student loans include a clause that triggers an automatic default if the cosigner dies, even if the payments are up to date. While this is becoming less common, it is still found in some older or stricter contracts. Lenders may not enforce this clause, especially if the borrower is proactive and communicates early and often. Some lenders will simply remove the cosigner and let the borrower continue making payments. Others might review the borrower's credit or reassess their eligibility, although calling the full loan due immediately is rare.
If the loan includes an automatic default clause, the borrower can consider refinancing with a new private lender. Refinancing with a new lender can help remove the deceased cosigner and possibly lower the interest rate. If the borrower's credit has improved or they have found someone else to cosign, refinancing could give them a clean slate without the emotional weight of an old loan tied to a deceased loved one.
It is important to note that federal student loans do not require cosigners, so if the loan is federal, the borrower is in the clear. Additionally, some private lenders, such as Wells Fargo and Sallie Mae, release the cosigner if they die and do not put the loan into default.
To avoid potential issues, it is recommended to review the terms of the loan and the loan agreement before signing. Each lender and loan agreement is different, so it is essential to understand the responsibilities in the event of the cosigner's death.
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Frequently asked questions
First, check your loan documents, specifically your promissory note, which outlines your loan's terms, including what happens if your cosigner passes away. If you don't have a copy, you can usually access it through your lender's online portal.
Some private lenders require the total balance to be paid immediately after a cosigner passes away, even if the borrower has been keeping up with the monthly payments. This is known as an automatic default clause, which can negatively affect the borrower's credit score and make it more challenging to secure credit cards, car loans, or mortgages. However, these clauses are becoming rarer due to pressure from the Consumer Financial Protection Bureau.
For federal student loans, this won't be an issue as these loans don't use cosigners, and all debt is automatically discharged upon the student's death. This death discharge also applies to Parent PLUS Loans if either the student or parent passes away. However, private student loans do not offer the same protection, and the cosigner may be held responsible for the remaining debt.
A cosigner assumes legal responsibility to pay a debt if the primary borrower can't make payments. They help the borrower secure lower interest rates by promising to be responsible for the loan if they are unable to pay. However, cosigners are not allowed to dip into the loan funds and are only a backup in case of non-payment.
Some lenders offer a cosigner release option, but not all. To qualify, the borrower will usually need to have made on-time loan payments for a certain number of consecutive months. The borrower can also release the cosigner by refinancing the loans in their own name once their financial situation improves.
