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Co-signer’s death spurs loan default

By Allison Ross ·
Wednesday, April 23, 2014
Posted: 11 am ET

There's a small but tricky provision in many private student loan contracts that could result in big consequences for borrowers, the Consumer Financial Protection Bureau says in a new report.

That provision says if the co-signer of the student loan dies or files for bankruptcy, the loan holder can require complete repayment of the loan.

In other words, a student who is diligently paying a loan on time but whose co-signing parent or grandparent dies could suddenly find herself forced into default on the loan, the CFPB says.

"Students often rely on parents or grandparents to co-sign their private student loans to achieve the dream of higher education," CFPB Director Richard Cordray says in a statement. "When tragedy triggers an automatic default, responsible borrowers are thrown into financial distress with demands of immediate repayment."

Confusion during tragedy

The CFPB report says it has received complaints from consumers about being called to fulfill a loan obligation when a co-signing parent dies.

"Consumers describe their confusion when they receive notices to pay in full since they believed their loan to be in good standing and current," the report says.

The CFPB says it has also received complaints about loan holders trying to collect from a co-signer's estate even after the estate has been closed and settled.

It's unclear how often this type of case occurs.

Richard Hunt, president and CEO of the Consumer Bankers Association, says his association is not aware of any lenders who have a typical practice of accelerating the payment of a loan in good standing upon the death or permanent disability of a co-signer.

"When tragic circumstances occur, CBA members work with their customers carefully and compassionately," Hunt says in a statement, calling it a "rare occurrence" that a lender would call in a loan in good standing because of the death of a co-signer.

"It is common practice for student loan lenders to release co-signers from loan obligations upon the death or permanent disability of a student borrower," Hunt says in the statement.

Co-signing loans

Lenders have become more cautious about their lending practices, especially in the wake of the financial crisis. Private lenders are increasingly requiring co-signers for student loans, the CFPB report says.

More than 90 percent of new private student loans are co-signed, often by a parent or grandparent, according to a 2012 report on private student loans published by the CFPB and the Department of Education.

"Even when a co-signer is not required, obtaining one can lead to a lower interest rate, since the co-signer is also obligated to repay the loan," the report says.

Bankrate's Debt Adviser, Steve Bucci, wrote recently that it can be difficult to get out of a co-signed loan and that it may be best not to get into a co-signed loan, if possible.

Getting out of a co-signed loan

Indeed, consumers complain to the CFPB about troubles releasing a co-signer on the loan, with required forms sometimes hard to find or to access, or policies that are unclear, the report says.

It noted one instance where a borrower was told by the lender that the co-signer could be released after 28 on-time payments. "After making these payments, the consumer learned that 36 payments were required before a co-signer could be released," the report says. After making the 36 payments, the borrower found out the company policy had changed to 48 on-time payments.

"The CFPB has received complaints from borrowers who have been denied co-signer releases for unknown reasons or for technical reasons that disqualify them," the report says.

Bankrate has tips on how to destroy student loan debt.

Are you a co-signer on any student loans, or do you have a co-signer on your student loans? Share your stories with us in the comments.

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Cindy B
September 24, 2014 at 6:09 pm

Federally backed student loans called Parent Loans are signed only by the parent. If the parent that signed the loan dies (and only the parent that signed the loan even in a community property state) the loan is forgiven. My husband was the only signer on the Parent Loan. He died and the Parent Loan was forgiven.

September 23, 2014 at 12:01 pm

some of u need ot go sit in @ a hearing regarding student loan, the judge will ask "did u sign this and attend?" if your answer ris yes, u owe period! good luck people, best way to get rid of student debt is to let it get default then let the collector settle, or give up 0% interest for as long as u repay,

September 23, 2014 at 12:01 pm

some of u need ot go sit in @ a hearing regarding student loan, the judge will ask "did u sign this and attend?" if your answer ris yes, u owe period! good luck people, best way to get rid of student debt is to let it get default then let the collector settle, or give up 0% interest for as long as u repay,

August 28, 2014 at 8:04 pm

This is referred to as a 'jeopardy' clause. I was in the lending business most of my working life (now retired). This article seems to indicate it's only in student loans. Incorrect. A jeopardy clause can cover many situations. Did the co-signor die, did either party get jail or prison time, did either file bankruptcy, did either party have something repossessed from another lender? If the lender feels he is in jeopardy they can accelerate the loan. The list is endless. I am not saying it's a good or bad thing, just know that wording is somewhere in most any promissory note, or security agreement you sign.

Gerald Haag
August 06, 2014 at 9:17 pm

It,s terrible if a parent dies and the child is held responsible. What if the loan was outstanding to the parent only? Which the financiers make it if the child does not make payments.!!

What is my answer...the loan should be null and void.

Lynne B
July 28, 2014 at 11:13 pm

If you cosigned the loan and the other party on the loan refuses to make the payments, then you are liable for the debt. I do not know how they can demand such a high payment on a $3k loan however, unless the original loan terms were for $500 a month. Hold onto that paperwork (hopefully you got it in writing, if not request it in writing that they will not accept your $50) and present it in court and state you made a good faith offer to repay the debt, but you were refused.

Keep in mind also that debt collectors like to play hardball and it's possible you can get better terms in court. You will need to show proof of income and expenses like housing and utilities, so the judge can see what you can afford to pay.

On a federally-backed student loan they can take your income tax refunds until the debt is paid also.

July 21, 2014 at 5:49 pm

i am going to court for a student loan i co-sign, i didn't know about it because i thaught i was signing a parent plus loan. i offer to pay 50 dollars a month , but the law office want $500.

It's a 3,000 and a little over loan. so i decided to go to court and see what the courts will say. any suggestion