Paying for college is at an almost-crisis level as tuition rates continue to rise and taking out loans to cover the cost is becoming increasingly common. When it comes to federal loans, there are limits to how much you can borrow, which may make it necessary to turn to private lenders to fill the gaps. Because private lenders look at your credit score, many students have to enlist the aid of a co-signer, usually a parent, to qualify. The co-signer acts as a kind of insurance policy for the lender, but if they pass away before the loan balance is paid off, you could be facing some dire financial consequences.
What Auto-Default Policies Mean for Borrowers
Federal student loans are backed by the government, but private lenders generally don’t have that kind of assurance, so if you don’t pay, they’re limited as to what kinds of actions they can take to collect what you owe.
One of the things that private student loan issuers often do is include an automatic default policy as part of the loan agreement. If your co-signer dies or ends up going bankrupt, the entire balance of your loan automatically becomes due.
Aside from potentially putting you on the hook for thousands of dollars, an automatic default can also go against your credit. Once it shows up on your credit report, you’ll see your credit score quickly go down the drain.
If you’re not able to get the lender to work with you on getting the loan paid off, the default can stick around for 7 years, making it more difficult to get a mortgage, buy a car or even get a credit card.
Appealing for a Co-signer Release
If you’re in a situation where your co-signer has developed a terminal illness or already passed away, you may be able to avoid default by asking your lender for a release. Basically, the goal is to successfully argue that you’re responsible enough to handle the loan payments without the co-signer’s guarantee so the lender will remove their name from the debt.
Not every lender allows for the release of co-signers, and whether or not they’ll grant your request depends on a lot of different factors. If the lender is open to the idea, they’ll look at your current income, your expenses, your assets and your credit history to try to gauge how much risk is involved. You may also be required to make a certain number of on-time payments before a release becomes an option.
Negotiating a Better Deal
In addition to requesting a release, you can and should call up your loan servicer and attempt to renegotiate your repayment terms. If you’ve been paying on time all along and you’re not in danger of defaulting outside of the auto-default clause, they might be willing to let you modify the loan.
Keep in mind, however, that this might be a tough sell since private student loan issuers tend to be less flexible when it comes to changing the terms of borrower agreements.
Bringing a New Co-signer Onboard
When applying for a co-signer release and trying to cut a deal with your lender fall flat, there’s always door number three. If you’re able to find someone who’s willing to serve as your new co-signer, you could refinance the loans with a different bank. Aside from getting the default monkey off your bank, you might even be able to reduce your interest rate and lower your monthly payments in the process.
If you’re in the market for a new-cosigner, you’ll want to make sure you choose wisely. The person who agrees to sign on the dotted line for you should have a good credit history and generally be responsible with their finances; otherwise, you might not qualify for the lowest rates.
It’s also not a bad idea to consider their physical health if you’re worried about ending up back at square one should something unexpected happen to them down the line.
When the Lender Won’t Play Ball
Bankruptcy is usually the option of last resort in any situation where you’re stuck with a boatload of debt that you can’t afford to pay. Normally, bankruptcy is reserved for things like credit card debt or medical bills, but the door isn’t completely shut on discharging private student loan debts.
While it can be very difficult to do, it’s not impossible, particularly if you have a long-term, sustained financial hardship that keeps you from making any headway on the loans.
If that doesn’t apply to you, you could always try a different angle if you don’t think the school you got your degree from qualifies as an eligible educational institution. This means any college or university that’s excluded from participating in federal student aid programs.
It may seem like a stretch, but if you’re absolutely drowning in private loan debt, it’s worth it to at least consider whether eliminating them in bankruptcy is a possibility.
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