Many student loan companies are automatically placing accounts into default status when a cosigner dies or declares bankruptcy, even when the accounts are current (being paid on time). Once in default, many loan companies will demand payment of the balance in full. This often ruins credit scores and leads to harassing collections calls.
This is crazy. It would seem that if you are making on time loan payments every month, you would not face default.
One solution is to immediately notify the loan company upon the death or bankruptcy of the cosigner and ask that the cosigner be removed. Let them know you are financially able to pay the loan on your own (The link below has sample language to use). This does not always solve the issue. It may be difficult to get a clear answer on who to send the letter to and customer service may not have a protocol on how to handle the request. Also, if your payments are behind, they may not grant the request to remove the cosigner. At that point, I suggest you contact the Consumer Finance Protection Bureau – their link is copied below (and is the source of the information contained in this post).
For you cosigners out there, ask to be removed as a cosigner once payments are being made regularly and your family member/borrower is gainfully employed. The link below has tips for this as well.
When a loved one dies, check to see if they served as a cosigner for any of their kid’s or grandkid’s school loans. When we handle probate cases in our office, this will now be part of the service we offer our clients.