It’s a sad situation that does happen from time to time: A student loan cosigner can die unexpectedly, leaving the student to wonder what will happen to them. While the grieving process can be difficult when it comes to losing someone you care about, there are very important financial ramifications that need to be considered as well.
You have some important homework to do to understand what happens next. When reviewing your loan documents, you may find the need to take action quickly to protect your finances and credit in the event of a student loan cosigner death.
What to do if your student loan cosigner dies
Review your student loan documentation
The worst thing you can do is ignore the situation. Within a few days of the bad news, dig out your student loan documents so you can review the legal implications of the death. If you can’t find the documents, log into the lender website to see if you can find documentation there.
Once you find your documents, looks for any paragraph that mentions cosigners or death of one of the parties. In many cases, you will find that if your cosigner dies, things will go on as they did before. As long as you never miss a payment or come up short, nothing changes dramatically.
However, some private lenders have a clause in their contracts where the entire loan balance is due immediately. Or, you could enter something known as an “automatic default,” which is a huge blow to your finances and credit.
If you look at your other credit cards and loans, you might find that defaulting on one loan causes other loans to go into default or come due. This can cause such damage to your credit that you may need a decade or more to recover.
If you have an automatic default provision, look to refinance the loans immediately. Or, if a cosigner is terminally ill, look into this information ahead of time. It may be necessary for you to make changes to your loan before the student loan cosigner dies.
Inform your lender if required
If your student loan cosigner dies, you may be contractually obligated to inform the bank immediately. Ignoring that may put you in breach of contract. That can come with legal and financial fallout, such as getting sued by the bank or having your loan placed into the dreaded automatic default.
If you are obligated to inform the bank, doing so is generally in your best interest. In many cases, they will just update the loan documentation and list you as the sole responsible party. However, all cases are not that simple.
Some banks scan public death records, automatically match names, and place loans into default. Others exercise more discretion and look at things on a case-by-case basis. If your loan falls into the latter category, you may be able to have the bank release the deceased party from the loan, and everything will go on normally as if you were the only borrower.
Refinance your student loan
If you are facing an automatic default when your student loan cosigner dies, look into moving your loan to another bank before the default kicks in. While refinancing can take some time, you may be able to push it through quickly. Just make sure you’re not moving to a loan with a higher interest rate.
If you can, try to refinance without a cosigner. If you have been making on-time payments every month, your credit score has likely improved, which will help you when refinancing.
The good news is lenders can see the on-time payment history on your credit report. This usually creates a positive impact their decision.
When you refinance, your old loan is paid off and replaced with a new loan at a new bank. There are generally some closing fees for doing this, but if it can help you avoid a default, those fees are completely worthwhile.
What happens to your cosigner if you die?
Let’s flip the perspective for a moment. What happens to your student loans if you pass away and you have a cosigner?
If you have federal student loans only, the loans are discharged and no one owes another dime. Although student loans are notoriously difficult to discharge through bankruptcy or any other means, federal student loans are discharged with the death of the student loan borrower.
Private student loans are another story. Some private student loan lenders do discharge a loan after the borrower passes away. Others, however, will try to claim the remaining balance from an unmarried borrower’s estate. This can affect life insurance, inheritance, and other financial transactions after you pass away.
If you are married and have private student loans, the lender could go after your spouse for the remaining balance. However, that is typically only the case if you took on the loans after you were already married.
After student loan cosigner death
It is horrible to have to go through the death of someone you care about, but ignoring the financial fallout when a student loan cosigner dies can make it much worse. Take charge and take the steps needed to protect your financial future.
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