Concerns about student loans tend to take a back seat if unfortunately, a loved one passes away. A period as difficult as someone’s passing can be especially distressing if they happened to be a cosigner on your student loans. This is because a cosigner’s death can have negative repercussions on a borrower, even if it is the case that they have never missed a repayment.
This may sound unfair to you. Worry not for media and government attention has been brought to unfair practices involving a cosigner’s passing.
As a borrower, however, you are required to be aware of your loans’ financial aftermath. There are some things that you may have to do after your cosigner’s passing in order to preserve your credit and finances in good shape.
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The Danger of Automatic Default
Some student loan companies have this provision added to their contracts that causes a borrower’s student loans to go into default automatically in the case of a cosigner’s death. This is also true for some scenarios when a cosigner declares bankruptcy. What’s more upsetting about this practice is that this will be carried out even if the borrower has never missed a payment.
This practice enabled student loan lenders in order to have some level of control over the cosigner’s estate and other assets.
Needless to say, quite a number of borrowers found this to be an unfair provision. People filed complaints regarding the same with the Consumer Financial Protection Bureau. The CFPB took some actions to make sure lenders stopped enforcing this provision on previous contracts and did not make it a part of their future contracts. Lenders like Sallie Mae and Wells Fargo promised to comply.
While that may sound comforting to you, bear in mind that such provisions are still not deemed as illegal. So some lenders may indulge in enforcing them. If you find any lender still executing such provisions, you may take this issue to the CFPB. You may even try to create some negative publicity for their brand. The media is likely to be moved since losing a loved one can be very hard. Having a loan lender behave insensitively can be even more dismaying.
What to do if your student loan cosigner dies?
Here are some things you should do if your cosigner passes.
Go through your student loan documentation
Do not neglect the situation at hand if your cosigner passes. Go through all your student loan documents to understand the legal obligations and implications.
Search, in particular, for any mention of the cosigner's death. More often than not, nothing much will change if a cosigner dies. This is for as long as you are regular and punctual with your payments.
But as already mentioned, automatic default is an unfair provision that some lenders still have written into their contracts and implement. This can adversely affect your credit and finances.
You may want to refinance your student loans if auto-default is a provision that you are subjected to. If your cosigner is terminally ill, you may want to do some research on this ahead of time.
Should you tell your lender?
Whether you should disclose this information to your lender or not depends entirely on your obligation. Some contracts state that informing your lender of any cosigner death is mandatory. In that case, failing to do the same may put you in breach of contract. This may have adverse financial ramifications for yourself and your loan. Your loan may fall into default or you may get sued, even.
Informing the lender may have different outcomes depending on your lender and your special case. In some cases, the loan documentation gets updated and the borrower gets passed the responsibility of having to repay the loans. The cosigner gets released.
In other cases it may be a little more complicated. If auto-default is a provision, then that gets carried out.
But the borrower generally does not benefit by informing the lender about a cosigner’s death. So inform your lender only if it is explicitly stated in your contract to do so.
Refinancing your student loan
If auto-default is a provision that is included in your contract, after the passing of your cosigner, your student loan may fall into default. In that case, you may want to change your lender by refinancing your student loan before the defaulting commences.
Ensure that you do not fall into a new refinanced loan with a higher rate of interest.
If you have a record of making repayments on time each month, then you may qualify for refinancing without a cosigner with most private refinancing firms.
Avoid adding another cosigner
Some lenders may demand the involvement of a new cosigner on the occasion of an existing one’s demise. This is often not desirable or beneficial for the borrower. This obviously, will only benefit the lender and is not something a borrower should think about unless their contract demands them to do so.
Again, if a lender is vehement about getting a new cosigner involved against your will, you can always think about changing your lender and getting your loan refinanced.
The event of a cosigner’s death can impose quite some emotional and financial stress on a borrower. This should not affect your student loans in any way if you have been repaying them regularly. Some lenders may indulge in unfair practices but most of them do not.
Do not ignore the financial consequences that entail a cosigner’s passing. Take responsibility, do your research and do the needful to protect your finances and avoid any trouble.