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Student loans may go into default if co-signer dies or declares bankruptcy

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Financial planners recommend that if you have to choose between financing your retirement and financing your child’s (or grandchild’s) education—choose your retirement.  That’s usually because it’s difficult for most people to do both and their retirement savings take a hit as a result.  But, if you are only thinking about co-signing a loan rather than paying for college outright, financial professionals are urging caution there as well.

According to the Federal Reserve Bank of New York, Americans 60 and over still owe about 36 billion in student loans.  About 10 percent of those loans are delinquent.  Some of those loans were for their own education and some were co-signs.  Unlike most loans, student loans aren’t discharged with a bankruptcy.  This leaves some older Americans at risk of having student loan payments withheld from Social Security payments.  Now, there’s a more compelling reason not to co-sign a loan.  Some financial institutions are demanding that borrowers immediately repay the loan if the co-signer dies or files for bankruptcy.  Even if the borrower keeps up with payments, the loans may go into auto-default, thereby damaging the borrower’s credit and potentially impacting not just credit but also employment and housing options. Some borrowers have complained that debt collectors have tried to get the co-signer’s estate to pay off the debt.

About 90 percent of student loans have a co-signer because unlike federal loans, private lenders usually require a college student with little to no credit history to have a cosigner.  However, they’re not always transparent about how to remove co-signers from the loan.  Anyone obtaining a student loan should get clarification as to when it’s possible to remove a co-signer from a loan and any steps necessary to make that happen.  The Consumer Financial Credit Bureau has made additional information including sample letters for those seeking a release from a co-sign here.


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