What happens when a primary borrower on a student loan dies?
This is a fair question.
- The cosigner will most likely face an immediate balloon payment of the remaining balance of the loan
Which types of loans have cosigners?
Most student loans, however, do not have cosigners.
In fact, Federal loans, which are the majority of student loans, never have cosigners.
Generally speaking, only private student loans have cosigners.
PRIVATE STUDENT LOANS AND COSIGNERS
Private student loans usually come from banks like Chase Manhattan, or Discover.
They are less common than federal student loans, but are still nondischargeable in bankruptcy.
Unlike the government, which makes loans with the goal of helping people go to college and educate themselves so that we can have a better society, private lenders care only about making money off of the loans.
One way to maximize profits and minimize risk is to insist on cosigners for all loans. A cosigner is someone who agrees to pay a loan if the primary borrower doesn’t repay the loan.
- Since college students usually do not have very much money, it is common for private student loan companies to insist that a parent or relative cosign the student loan
This way, if the borrower dies, or does not have enough money to repay the student loans, then the lender can still recover the loan from the cosigner.
WHAT HAPPENS WHEN THE PRIMARY BORROWER ON A STUDENT LOAN DIES?
- When the primary borrower dies, many private student loan contracts accelerate the payments
Acceleration means that they declare the entire balance of the loan due immediately, which can reach the tens of thousands of dollars.
Federal Parent Plus student loans are very different, as these are loans that the government makes to parents so that a child can go to school.
The child does not owe the loan, and if the child dies before the parent, then the federal government will forgive the rest of the Parent Plus loan, which is called the death discharge (Source, Federal Student Aid).
For this reason and others, these loans are better than private student loans.
CAN BANKRUPTCY HELP?
- Yes, a little
Student loans are not dischargeable in Chapter 7 bankruptcy in most circumstances, but Chapter 13 bankruptcy does allow the borrower or parent some flexibility in modifying the payment terms.
Chapter 13 bankruptcy can function like a 5 year repayment plan, which saves the parent from having to pay the entire loan balance at once.
Conclusion
If you’re worried about how you’ll manage financially if the primary borrower on a student loan dies, then we might be able to help you.
Contact Us at 612.724.4357 or visit one of our offices in Minneapolis, St Paul, Blaine, or Brooklyn Park and tell us what you need us to do for you.
