The liability on student loans varies with the type of loan. There are different rules for loans from the federal government and loans made by traditional banks.
The idea of a grandparent co-signing student loans for a beloved grandchild sounds like the picture of a loving family, doesn’t it? However, if a grandparent dies, what happens to the loan?
It depends, says nj.com, in its recent article, “What happens to student loans when borrower dies?” on the types of loans that were originally taken out.
Federal student loans typically don’t need a cosigner, because the loan isn’t dependent on your credit history, except for Direct PLUS loans. Those loans require the endorsement of a cosigner, if you have a weak credit history. If the borrower of a federal student loan dies—regardless of whether there was a cosigner or not—the loan is discharged by the government. The person’s estate is under no obligation to pay the loan. This includes Direct Subsidized Loans, Direct Unsubsidized Loans, Direct Consolidation Loans and Federal Perkins Loans.
However, before the government can discharge the loan, the survivors need to present the loan servicer with proof of death. This can be the original death certificate, a certified copy of the death certificate or an accurate and complete photocopy of either of these.
However, this isn’t the case with private loans. In taking out a private loan, a borrower must meet the lender's credit requirements. Sometimes, these requirements will make it necessary to have a cosigner, before being approved for the loan. Therefore, the cosigner is responsible for the debt, if the primary borrower doesn’t pay for any reason. That includes death.
Private student loans (including refinanced loans) are more like traditional personal loans. Private lenders may potentially make a claim on the estate for repayment, when you die. However, if the loans are only in your name, your children or other heirs are not generally considered on the hook to repay them.
With private loans, the death of either signer (primary or cosigner) can cause a default. In that case, the loan is called, and the entire balance becomes due immediately—despite the fact that the surviving signer has never missed a payment. It is rare for a private lender like a bank or credit union to release a cosigner from a debt, upon the death of the primary borrower.
Some lenders, like Sallie Mae's Smart Option Student Loans, offer death and disability forgiveness policies. It’s not the norm and shouldn’t be expected by all lenders. In some cases, it might make sense for parent cosigners to purchase a life insurance policy for their child. Then, in the event of death, parents would get the proceeds to help cover the repayment of cosigned student loans.
Another possible solution with the grandchild here is to seek removal from the loans if her credit rating has improved, since she first took out the loan. She may be able to refinance the loans in her own name, and/or consolidate them into one monthly payment both for simplicity and a lower rate.
Student loans can present wonderful opportunities, but they can also lead to significant financial problems that may plague the student for decades after graduation. Make sure everyone who is participating in the loan process understands the risks involved and the laws of your state to be protected from unexpected events.
Reference: nj.com (September 3, 2018) “What happens to student loans when borrower dies?”