Death is Risky Business for Co-Signers of Student Loans
Death is a very risky business. Sometimes it's even risky for a student whose parent co-signed a student loan for him, then dies. Students without financial resources often default on their loans. That is, they don't have the money to make the monthly payments. Many private lenders make the balance of a loan due immediately if the co-signer, a parent, grandparent, or anyone else who co-signed, becomes unable to perform the obligation to share responsibility for the loan. That's true not only if the co-signer dies, but also if he or she files for bankruptcy.
It's a serious problem according to a report by the Consumer Financial Protection Bureau. Default on a loan creates chaos with the student's credit rating, something that can last for years. Federal loans almost never require a co-signer, but over 90% of private loans do. The loan is a contract, so if automatic default is declared by the lender when the co-signer dies or declares bankruptcy, what is the poor student without funds to do? Negotiation with the lender is one possibility. Lenders who sit across the desk from the student looking at the black and white language of the contract, are notoriously difficult to deal with. Nevertheless, the student can try to negotiate new and more favorable repayment options.
Another option is to declare bankruptcy, but be aware that student loans are usually not discharged in bankruptcy. An exception to this general rule may be granted by the bankruptcy court if it is proven that the burden of repaying the loan would impose a severe hardship on the student. And, of course, no one wants to declare bankruptcy because of the stigma that often lasts for years. A final option the student may exercise is to consult with an attorney in this area who is an expert in finance and bankruptcy law. That professional can give greater detail about the possible ways to get relief from the loan and give guidance through them.