We have previously warned - on this blog - of the dangers of co-signing. Usually a relative or love interest asks the co-signer to simply add his or her signature to loan documents. "I just need your credit," the borrower says, "You'll never have to pay a cent." Nothing could be further from the truth. Creditworthiness is based on the borrower's ability to repay the loan. Sometimes the co-signer requirement is prompted by an aggressive car salesman or loan officer who wants to close the deal fast. The only reason an automotive dealer, mortgage company, or student lender would require a co-signer is if they doubt the borrower's ability to repay. The co-signer is taking precisely the risk the lender has declined.
Girlfriends and grandparents are typical targets. Sad as it may be, the co-signer is usually trading money for love. With a sense of betrayal, it is the co-signer who gets stuck having to pay the loan or risk devastation to their credit rating.
Even if the student dies by accidental injury or unexpected illness, and even without completing his or her intended degree, the grieving co-signer could still be on the hook to repay the deceased student's loans. And the lenders are relentless.
But now, a troubling twist has come to light. A Consumer Financial Protection Bureau report prompted the New York Times proofreaders to get to work reading the fine print of private student loan contracts. The NYT investigative journalists, with the help of eagle-eyed copy editors, verified what the CFPB had uncovered, and what increasing numbers of student loan borrowers have come to regret. Death of the co-signer triggers default of the loan.
What does that mean for the primary borrower? It means the full amount of the debt immediately comes due. You can read the full story here, as well as the underlying press release and report of the Consumer Financial Protection Bureau here.
Not all lenders are eager to accelerate the debt, preferring the steady stream of repayment. Much of the reported trillion dollars in outstanding student loan debt is bundled, packaged, securitized, and sold to downstream debt collectors. Many lenders would prefer simply to keep collecting on the original terms. And in California, a new law that went into effect January 1, 2014, requires debt collectors to produce competent evidence of the original loan. Since some debt buyers just purchase a spreadsheet of borrowers and balances, the original loan docs can be hard to come by. Any student borrower who realizes a new and unfamiliar finance company is trying to collect on a student loan should seek immediate professional legal advice.
Nonetheless, this is just more bad news for students. Already grieving their loved one, who did them a favor in their time of need, they are bound to regret their original co-signer request.