What Happens to Student Loan Debt When the Borrower Dies and There’s a Co-Signer?

When Las Vegas residents take out loans, banks do what they can to cover their risk. In cases of mortgages or cars, they demand a lien on the property the money is being borrowed to buy. When the money is borrowed to buy something that can’t be secured by a lien, banks charge high interest. In the case of student loans, banks supported legislation that made such debts difficult to discharge in bankruptcy absent a showing of “undue hardship,” a term Congress hasn’t defined.

Since the costs of higher education are still increasing, and the prospect of people graduating university with lots of debt and low income, banks have another option to reduce their risks: require the borrower to find someone with good credit to co-sign the loan. In the case of most student loans, this is going to be a parent, grandparent, or some other older, wealthier relative. In many cases this works fine, but misfortune happens and sometimes, the student borrower dies long before the loan is paid off. The question becomes: What happens if you are the co-signer.

  • For federal loans: If the loan is either an older guaranteed loan (from the Federal Family Education Loan (FFEL)) program or the now-dominant Direct Loan Program, then the loan is canceled upon the death of the borrower. The good news is that most student loans are federal loans from these two programs, so most co-signers are okay.
  • For non-federal loans: If the loan is not backed or issued by the federal government, then the co-signer is bound to pay the loan even if the debtor cannot, for all circumstances. This means that if the borrower is injured, decides to default, leaves the country and can’t be reached, becomes disabled, or dies, the bank will go after the co-signer to recover the costs.
  • It’s possible that as the co-signer you might not be given any warning about the borrower’s default, and the bank might claim its rights under the acceleration clause to order you to pay the full value of the loan.
  • Check the loan documents to see if you as the co-signer can be released from your obligation to cover the loan. Some loans allow this provided the borrow has been making timely payments.
  • The “undue hardship” standard applies to co-signers as well. If you are disabled or incapable of working, you might be able to discharge the loan in Chapter 7 bankruptcy.

If you have co-signed a student loan and are in a position where you must pay it because the borrower died, you deserve sympathy and a fresh start. Talk to an experienced Las Vegas bankruptcy attorney to discuss your options.

For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.

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