You probably wouldn’t expect much sympathy from your bank for the loss of a family member, but even the most cynical among us are expressing surprise over the findings of a recent report concerning certain debt collection tactics on student loans. Apparently, there are at least a few private lenders who consider the death of a parent who co-signed for a student loan to constitute an automatic default, and a reason to demand full, immediate payment of the entire amount due. In fact, some lenders were found to have placed borrowers with deceased co-signers into default despite not having sent a demand.
To be clear, this problem is limited to loans made by private institutions, not the government. And apparently, even among private companies, only a small number of lenders are dumb enough to include this self-defeating provision in their lending agreements. Most lenders want to avoid default as badly as their customers do, and the lack of any clear beneficiary makes this practice particularly hard to explain.
Steps to take in response
If you have a student loan with a private lender, the release of this report may serve as a good reminder to review your agreement every now and then to make sure you remember what your rights and obligations are. If your loan agreement includes the death of a cosigner among the events of default, life insurance policies on all of the borrowers would be worth looking into (although if the default can be automatically declared without a demand letter being sent, the amount of protection this could provide might be limited). Better yet, a comprehensive estate plan that identifies and deals with risks like this is always a good idea.
Also, the authors of the report noted that many loan agreements allow cosigners to remove themselves from the agreement after certain conditions have been met. In the event that your loan agreement contains such an option, you should take advantage of it at your earliest opportunity. Reducing the number of parties to your loan agreement reduces the number of ways that a nasty surprise like this can unexpectedly cause serious damage to your credit profile.
If you have financial ties to other people, such as a co-owned business, joint accounts, or co-signed loans, it is particularly important that you all have a plan in place in case one of you becomes unable to continue participating in your joint venture. At the very least, this means a will and power of attorney declarations for all parties, but may also include insurance and more sophisticated agreements, like a buy-sell provision. If you need help getting such a plan in place, please contact me here.