If you are a parent who (or even a grandparent) who has cosigned private student loans for your family member, you are in for a rude surprise if the borrower dies. The entire loan balance often becomes immediately payable. This is a rude surprise for an older family member who thinks Junior is going to be the one who gets the education that nobody else in the family could get, only to find that Junior is dead and the bills for a professional education are suddenly falling on a senior citizen (or near senior citizen) with anything but a professional income.
Senator Elizabeth Warren, bless her heart, is trying to bring this injustice to light and hopefully craft a policy response. I have had to counsel several parents and grandparents who suddenly found themselves the target of aggressive student loan collections. I can tell you that as a general rule government-backed student loans are not the type that have this problem; and thankfully, private student loans cannot result in the garnishment of Social Security income. Unfortunately private student loans (even for a cosigner) can’t generally be discharged by bankruptcy, but that’s something Senator Warren hopes to change. (There is an exception to the rule against discharge of student loans in bankruptcy; and that is in the case of “undue hardship”. I think cases involving cosigners on a fixed income with a dead or disabled student borrower might often meet the “undue hardship” standard.)
If you are asked to cosign student loans for your son or daughter, I suggest that you get quotes on life insurance and long term disability insurance sufficient to cover the loan. The cost of that insurance should be reflected in your decision to borrow the money since that risk is a cost that you will bear. If a grandchild asks you to cosign a loan, you should ask yourself and your grandchild what kind of college worthy of the name needs grandparent cosigners. If they don’t have faith in the student’s ability to pay back the loan from future income, then maybe the program isn’t worth the money anyway. Remember, the resources of parents are considered in the formula for determining student aid; but the resources from grandparents are not. Worthwhile schools can usually fund a way to fund qualified students without Grandma giving an IOU.
If you are in Indiana and you are being subjected to collection activity as a cosigner, I am interested in hearing from you. Please contact me through the links at the top right of this page.