Life can be full of ups and downs, hard times, and surprises. One tragic case is when a family member passes away. Unpleasant for most of us to think about, but bear with me.
Aside from the deep sense of loss, you would also be left dealing with a myriad of legal and financial ramifications. This can range from setting up forwarding addresses and canceling subscriptions, to things like selling property and settling disputes over a will.
Now imagine that while you’re dealing with all of this, you receive a notice about your student loans. They’re probably the last thing on your mind. But you find out you’re suddenly in default with the full loan balance due immediately. This is despite consistent, on-time payments.
This is something that could’ve been potentially prevented. One possible solution: cosigner release.
So when would you want to pursue cosigner release for student loans? Read on to find out.
The Issue with Cosigners
A cosigner is someone other than the primary borrower of a loan who signs onto financial responsibility for the loan. This helps the primary borrower acquire a lower interest rate. By doing this, a cosigner is attaching their credit to the loan, which puts their financial reputation (including their credit) in the hands of the borrower.
If the borrower fails to keep up on payments, this can negatively affect both the primary borrower’s and the cosigner’s credit. What’s more, if either the primary borrower or cosigner becomes somehow unable to pay back their loans by means of injury or death, the loan then becomes the legal responsibility of the other borrower.
But it’s not just cosigners who are at risk. Borrowers could be headed for trouble and an unpleasant surprise too — which makes the case for cosigner release for helping both parties.
According to a 2014 report by Consumer Financial Protection Bureau (CFPB), private student loan borrowers are finding out they are in default on their loans after the death of their cosigner.
As if dealing with the death of a loved one isn’t hard enough, having your loans go straight to default is salt on the wound.
The CFPB report states:
“Since accepting complaints on private student loans, we continue to receive reports from borrowers discovering that they are in default, when their co-signer, often a parent or grandparent, dies. Some consumers assume that death of a co-signer will result in a release of the co-signer’s obligation to repay. Consumers describe their confusion when they receive notices to pay in full since they believed their loan to be in good standing and current.”
This situation can come as a shock to borrowers who have a positive repayment history and suddenly find themselves in default. Default typically occurs when borrowers fail to make a payment for 270 days. But with private student loans, the death of a cosigner can trigger “auto-default.”
The point is that cosigning is a risk that is taken not only by the cosigner, but by the borrower as well. If either one should pass away, the other becomes solely responsible for the loan.
What Are Your Options?
The picture I painted isn’t very pretty, right? But as a borrower, it’s important to inform yourself about what’s going on in the student loan arena and know your rights.
If you have a cosigner for your private loans, here are some steps to get started with student loan cosigner release.
Step 1: Contact Your Lender
The first step is to get in touch with your lender and ask about cosigner release. Luckily, the CFPB has your back and has crafted these nifty sample letters that you can use to communicate with your lender.
One of the letters is for inquiring about the process of cosigner release, while the other is for the cosigner, like parents, who are looking to be removed from the loan.
You can edit the letters as you wish and send them via email or snail mail to your lender. The most important thing is to get everything in writing so that you are clear on the process as well as the requirements for cosigner release.
Step 2: Gather Your Paperwork and Review Requirements
Many lenders will have specific requirements in order to get a cosigner released. Often this can be in the form of consecutive on-time payments, proof of income, proof of graduation, and creditworthiness. Make sure you get your paperwork in order, such as pay stubs, cosigner release forms, etc. Be sure to make copies for yourself as well!
Private student loan giant, Sallie Mae, has a list of requirements that borrowers need to meet to pursue cosigner release — including proof of income, a credit review, and more.
Step 3: Apply for Student Loan Cosigner Release
After contacting your lender and gathering your information, it’s time to apply for cosigner release. Send in your documentation via certified mail or via email and keep any communication from your lender. You should hear a response within several weeks — and if you don’t, follow up!
It’s key that you follow up, as many lenders don’t make it easy to access this information or don’t advertise cosigner release as an option at all.
Once you complete the process of getting your cosigner released, be sure to keep any documentation related to the process for your records to help you avoid any issues down the line.
Although cosigner release is something you should look into, I’d be remiss if I didn’t share some of the struggles borrowers deal with when actually trying to get their cosigner released.
“Borrowers have submitted complaints to the CFPB about problems releasing cosigner, even though the benefit was prominently advertised prior to the origination of the loan,” according to the CFPB report from above.
Optional: Release Cosigners Through Student Loan Refinancing
Another option for obtaining cosigner release is to refinance your loans through another bank. In addition to getting a cosigner removed from your loans, you may be able to reduce interest rates and save money on your loan repayment too. See our post on student loan refinancing to learn more about this cosigner release option.
While cosigner release may be a frustrating process of red tape and bureaucracy, it could save you from unnecessary trouble down the line.
Have you dealt with cosigner release? What was your experience?
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