American consumers owe more than $150 billion in outstanding private student loan debt. For some fortunate enough to have a family member with a solid credit history to co-sign on those loans, they may be able to save a bit on interest over time (in 2011, 90% of student loans issued were co-signed).
But at what cost?
Recently, the Internet was abuzz with stories of parents whose children had passed away far too young, and now those parents were charged with paying off the balance of their children’s private student loans. Why? Because they co-signed.
Federal student loans are eligible for a “death discharge,” which provides that, in the event the student passes, the loan will not be pursued for repayment. But private loans, on the other hand, typically do not include a death discharge—meaning that the lender can pursue co-signers of the loan for repayment (some even including an acceleration clause, meaning that the balance is due immediately). In some “community property” states, spouses may be on the hook for student loans—even if they did not co-sign.
Christopher Bryski was a college student who sustained a severe traumatic brain injury in 2004, and passed away in 2006. After his passing, his family was left with the responsibility of paying Christopher’s private student loans. His family has since worked with legislators to introduce, and re-introduce legislation that would prevent that from happening to other families. H.R. 2961: The Student Loan Protection Act of 2013 (aka, “Christopher’s Law”) was introduced in July 2013, but unfortunately stalled out in Congress. That bill, if passed, would have required private education lenders to define—clearly and concisely—borrower and cosigner obligations so that students and co-signers would be armed with information to make appropriate borrowing decisions (and arrangements in the event of the student borrower’s death or disability).
My blog posts in the past have made it pretty clear about my confidence in Congress passing laws that would protect consumers (of note: Christopher’s Law had been introduced before without a vote). Without congressional action, what can you do to protect your loved ones if you have a co-signer?
Read the small print. As any lawyer would tell you, the Devil’s in the details. Check to see if the private loan has a death discharge clause. If not, look for terms that provide a co-signer release—some student loans will release the co-signer if the borrower makes 48 consecutive on-time monthly payments.
Pay more than the minimum monthly payment, especially on loans that charge the most interest. This will reduce the principal balance of the loan faster. Pursuant to the Higher Education Opportunity Act of 2008 (which amended the Truth in Lending Act), borrowers cannot charge extra fees or penalties for early repayment or prepayment of any private education loan.
Consider a life insurance policy. A term life insurance policy (with the co-signer as the beneficiary) for the length of time it will take to repay your loan may cost a couple hundred dollars per year for younger individuals, and may be well worth it for peace of mind.
This blog post probably will not answer all of your questions. Thankfully, the Consumer Financial Protection Bureau, which was created in 2011 in response to the financial crisis of 2008, has a wealth of information available to consumers considering student loans, mortgages, and credit cards. The CFPB frequently answers questions submitted to its website (and hosts answers to thousands of questions that have already been asked). Surprisingly, the creation of the CFPB was accomplished by an act of Congress.
For more information, you can visit the CFPB’s website at www.consumerfinance.gov/paying-for-college.
Photo Credit: Simon Cunningham