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April 24, 2014 12:30 PM Student Loan Debt Sometimes Continues Even When You’re Dead

By Daniel Luzer

Student loans can stay around even after you die. Vox has a really sad story about people still paying off student loans after the original loan holder (or cosigner) has died.

As Libby Nelson writes:

Nearly all new private student loans now have a cosigner — a parent, grandparent or other adult taking out the loan jointly with a student. In some cases, this is a bank requirement for taking out the loan in the first place; in other cases, a cosigner with good credit makes it easier for a student to get a good interest rate.
But there’s a catch. If anyone whose name is on a private loan dies or declares bankruptcy, the lender can put the loan in default and demand payment in full. If a loan is in default, it makes it easier for lenders to collect on the unpaid balance. Default can hurt the survivor’s credit score, and it’s particularly unfair if the loan actually was being repaid.

Cemetary

While this would seem particularly sad in the case of that people who still have their own outstanding student loans upon death, which is often the case of people who die at relatively young ages, the article outlines what appears to be a rather more troublesome practice.

The Consumer Financial Protection Bureau has been getting complaints about banks putting loan in default and demand payment in full when the cosigner dies.

That means you took out a private a loan for college and your father cosigned for it. Then you graduated and got a job and made regular payments on the loan. Good for you. Then one day your father dies unexpectedly and the bank tries to collect on the loan all at once from his estate.

As Nelson points out, this is not only cruel, it’s also “bad business practice.” If borrowers pay back the entire loan out of a parent or grandparent’s estate, the loan issuer will get less money than if the borrower just made regular payments.

This rule applies only to privately held student loans. While often private lenders will discharge debt upon death, they’re not legally required to do so. Sallie Mae is one student loan company that apparently keeps trying to collect when people die.

For loans held by the federal government, which are most of them, when debtors die the balance is essentially zeroed out and the heirs don’t have to make payments. [Image via]

Daniel Luzer is the news editor at Governing Magazine and former web editor of the Washington Monthly. Find him on Twitter: @Daniel_Luzer

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