Cosigning Surprises

The article is ominously entitled When Student Loans Live On After Death. And it begins, dramatically, thusly:Churchyard Derek Harper - crop

In July 2006, 25-year-old Christopher Bryski died.

His private student loans didn’t. Mr. Bryski’s family in Marlton, N.J., continues to make monthly payments on his loans—the result of a potentially costly loophole in the rules governing student lending.

And what, you may ask, is the nature of this hitherto obscure loophole that The Wall Street Journal heroically exposed this weekend? Turns out, if a loan has a cosigner, and the borrower dies, that cosigner is considered liable for the debt. This was a surprise to both Mr. Bryski’s father, who cosigned his student loans, and Mary Pilon, who wrote the article.

Are you freakin’ kidding me?

Cosigning a loan is not a complex concept. If the borrower does not pay, then the cosigner must. Why the borrower defaulted is not part of the equation. Why would it be? The principle is to reduce the risk of default to the lender, and hence the interest rate, by having two people stand behind the promise to pay the loan back.

A reasonable argument could be made that there should be an exception to the usual way cosigning works for student loans. The death of the borrower in that case is so tragic, and indeed so unlikely, that perhaps it would make sense to bake into these loans a term life insurance policy that would leave the cosigner on the hook only for more typical forms of default. Of course, that would mean that the interest rates on these loans would be a bit higher, but perhaps that is a reasonable cost to bear.

But as of now, there is no such exception, and assuming one, on the grounds that that is how it ought to work, is simply irrational. And yet, we are to believe that the non-existence of this exception is widely surprising.

The Bryski case sparked the Christopher Bryski Student Loan Protection Act, sponsored by U.S. Rep. John Adler (D., N.J.) and introduced into the House of Representatives in May. The law, which has attracted co-sponsors from both parties, would require private student lenders—among the biggest are Sallie Mae, Citigroup Inc. and Wells Fargo & Co.—to explain to students the co-signer obligations in the event a borrower dies, as well as insurance options for loans and the circumstances under which loans can be discharged—though it wouldn’t require lenders to forgive loans.

In other words, we need to force these sinister peddlers of private loans to explain what cosigning means in the case of the death of the borrower. I might add that it might be a good idea to explain the entire cosigning concept slowly and clearly.

(The WSJ text suggests that the bill requires this explanation be given only to the borrower, not the cosigner. Much as this would amuse me, it is not the case. The bill requires disclosure to both students and cosigners.)

Besides being evidence of a broad misunderstanding of a relatively simple concept, the WSJ article also feeds into a popular media narrative about the superiority of government over private student loans. Federal loans, it seems, are much more decent and reasonable, yet another way government is better than free enterprise.

[I]n cases where the student dies, the co-signers often are obliged to pay off the balance of the loan themselves—a requirement typically not found in federal loans.

And:

Mr. Bryski’s federal student loans were deferred as soon as the family submitted a note from a doctor detailing his permanent condition. They were forgiven completely upon receipt of Mr. Bryski’s death certificate.

These statements are true, but misleading. Federal loans typically do not involve going after cosigners following the death of the borrower for the simple reason that federal loans typically (maybe universally?) do not have cosigners. I do not know this for a fact, but I have a strong hypothesis that Bryski’s federal loans were forgiven on his death, as were his credit cards, as any unsecured and non-cosigned loan to an insolvent estate would be. It is not a question of government vs. private sector but a question of cosigned or not.

Which brings us all the way back to what it means to cosign a loan and the ignorance of same. I believe that Bryski Senior really did not understand what he was agreeing to when he cosigned his son’s loans. To their credit, the Bryskis acknowledge that they owe the money and will not name the lender involved because they deserve no special criticism. And I am willing to grant that in a larger sense, Bryski Senior can’t be entirely blamed for sharing what is apparently a widespread ignorance.

And, in case it needs to be said, the Bryskis have suffered an almost unthinkable tragedy that I would not wish on my worst enemy.

But that is the limit of my sympathy. Bryski Senior did, of his own free will, sign a contract that involved borrowing $44,500. If he did not understand what signing obligated him to, who’s fault is that?

[Photo – Derek Harper]

No Comments

  • By Dan, August 9, 2010 @ 12:18 pm

    I can promise you that for most parents trying to finance a college education, the question is, “How the hell will I ever be able to pull this off?” and NOT wondering what happens if the student dies. Because, as you observe, so few young people actually do die that it simply doesn’t enter most people’s consciousness.

    I get that you hate government, think that people are stupid, and nobody takes any responsibility for themselves. To a degree, all of those things are probably true. But is it really so oppressive to require lenders to include one extra document that explicitly points out that the loan is not forgiven even upon death? And better yet, here are some options to help you manage that (miniscule) risk?

  • By Neil, August 9, 2010 @ 12:26 pm

    The bank probably told them this when they signed up for the loan. It’s generally pretty clear that cosignors are liable for the debt regardless of circumstance, and death usually specifically comes up in the conversation because the bank wants to sell an insurance policy at the same time. For an extra $2.50/month (effectively an extra 0.2% interest), my wife’s private loans are insured against death or disability. Government loans, of course, are not cosigned and it’s the government’s problem if she passes away.

  • By jim, August 9, 2010 @ 1:12 pm

    I’ll be honest and admit that I didn’t use to understand what co-signing a loan really meant. This was many years ago before I actually bothered to learn much about personal finances. I had a vague idea that co-signing was just helping someone get the loan. I don’t really know what I figured that meant, maybe I thought it was like giving a ‘character reference’ or something. But I didn’t actually realize the cosigner would be obligated to pay back the money. Of course it seems obvious but its not one of those things that people really teach a kid growing up (least not in my case).

    Federal loans are significantly better than private loans in a variety of other ways. Lower interest rates are the easy and obvious pro but theres many others.

  • By Adam, August 9, 2010 @ 2:42 pm

    My younger brother passed away at 20 in a vehicle accident, and I was very glad all his loans at SMU (private school) were federal and state grants rather than private loans. My parents were practically catatonic for almost a year, and although I was able to pay for the funeral and make arrangements of this sort, none of us was going to be able to start paying on his loans while they were on leave from work recovering.

  • By Boston Steve, August 9, 2010 @ 2:52 pm

    As much as he is disliked on this site, Dave Ramsey repeatedly tells his listeners to never co-sign a loan, for the simple reason that the co-signer is responsible in case of default, for whatever reason. By the numbers of calls he receives about co-signing it is apparent that many people either do not understand the concept, or are feigning ignorance, as if that will get them off the hook…..

    As for the tragedy of college age students passing away, unfortunately it is fairly common.

    I work at an university and we actually have a “dead student file”. The main reason for this file is to stop the steady flow of correspondence that would ordinarily go to the student and which would of course remind the student’s parents of their loss.

  • By Lance, August 9, 2010 @ 2:56 pm

    Dan– Do you think that document will be read?

    In any case, life insurance on the young and healthy is cheap. Seems reasonable to take out a benefit for the principal of the student loans plus, say, 25% and keep the policy until such time as the loans are paid off (perhaps drawing it down as the loans get paid off). Surely the concept of life insurance and what it means to cosign are not secrets.

    This is, by the way, something Suze Orman gets mostly right. Her advise is to never cosign anything unless you’re prepared, financially and emotionally, to pay off the entire debt by yourself in the event of the default.

  • By Craig, August 9, 2010 @ 3:37 pm

    I think I like the proposed legislation. I would also support Frank’s amendment to explain “slowly and clearly.” Maybe no words over two syllables? People don’t think these things through; that’s the tragedy of it. Fifty grand of term life insurance for this kid would have cost, what? Five bucks a month if that. My Dad had a small term life policy on me until I graduated, not because he cos-signed anything, but on the theory that if I went and got my stupid butt killed, there would be _some_ kind of expense he’d end up paying.

    The older I get, the more I come to realize that risk is the one concept no one in this world knows how to work with.

  • By jim, August 9, 2010 @ 5:00 pm

    I just checked quickquote.com and got a quote for a 10 year term policy on a 20 year old male for $50k. You can get that for $72/yr. If you raise the interest on the loan by 0.1% then that should easily cover the cost of writing off the balance of a student loan in the event of a premature death.

  • By Michael Covington, August 9, 2010 @ 8:39 pm

    Life insurance should be offered as an *option* with the loan. They could sell it and make money on it. But I cannot imagine co-signing the loan without going to the trouble of finding out what my obligations are. What do these people think a co-signer is?

  • By Digger, August 9, 2010 @ 9:31 pm

    I agree that is over the top to put in place federal regulations to protect loan co-signers in the event of a tragedy. (Would it be so far reaching as to do away with all those wonderful mortgage insurance products for which I am constantly solicited?) However, the federal (now Direct) Plus loans often have a co-signer. The Parent Plus loans are signed by the parent (and sometimes a separate endorser) of a dependent child. The Graduate Plus loan are sometimes co-signed by an endorser of an independent Graduate student. I am not sure if these loans are cancelled if the student dies or not. I’m just pointing out that they are prevalent.

  • By jim, August 10, 2010 @ 2:44 pm

    I’m actually surprised that the private student loan people haven’t already started selling a life insurance option at an obscene mark up to exploit peoples fears.

  • By Dow Quote, August 10, 2010 @ 3:10 pm

    Why should someone be responsible for abiding by an agreement they signed?

  • By jn, August 11, 2010 @ 5:47 pm

    You crack me up …. ‘are you freakin’ kidding me’ This is just one more example of the federal government taking our little hand and saying ‘here, let me help you with that – you are obviously too stupid to do it for yourself… you poor dear you…”

    Oh Please…. individual responsibility… people.. hello!!!!

  • By Patrick, August 17, 2010 @ 1:24 pm

    I think debts are not automatically forgiven when the debtor dies. The debts are still owed by the estate.

  • By Tom, August 18, 2011 @ 6:13 pm

    You’re stupid to deal with non-insured loans. you can cosign these loans without fear of death or disability of the borrower. The only time you’re on the hook is if they are living and become a dead beat. All Federal Loans are insured:

    34 CFR 685.212

    (a) Death. (1) If a borrower (or a student on whose behalf a parent borrowed a Direct PLUS Loan) dies, the Secretary discharges the obligation of the borrower and any endorser to make any further payments on the loan based on an original or certified copy of the borrower’s (or student’s in the case of a Direct PLUS loan obtained by a parent borrower) death certificate, or an accurate and complete photocopy of the original or certified copy of the borrower’s (or student’s in the case of a Direct PLUS loan obtained by a parent borrower) death certificate.

    “The individual can’t afford risk. Don’t vote Libertarian.”

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  • By Brenda, March 3, 2012 @ 3:32 pm

    Private student loans are nothing more than legalized loan sharks if you ask me. I’m grateful I didn’t get any private loans.

    Don’t forget the scandals involving universities steering student’s into higher cost private loans in a kick back arrangement with Sallie Mae or whoever, when the student would have qualified for less expensive govt loans! Sallie Mae was a non profit govt entity back when I went to school and I’m sure many people don’t realize it’s a private profit entity now!

    You are a very knowledgeable, savvy financial person, but the reality is most of America is NOT! Personal finance classes should be required in high school and college.

    Student loan debt is now surpassing trillion dollars, more than credit card debt and so many misinformed students and their families have become essentially indentured servants and are drowning in student loan debt and finding out they can’t even get decent paying jobs and now owe a mortgage without a house!

    It is very sad! So many millions of Americans whose futures are being destroyed and no one is speaking up to save them and stop this insanity!

    There are no consumer protections with student loans and they will garnish your social security and disability checks without mercy! Someone needs to put a stop to this. Consumer protections and bankruptcy protections should be restored, but the powers that be like things the way they are now. Heck you can’t even refinance a student loan and many are stuck with high rate loans! GREED!!! It’s just greed, plain and simple!

  • By Sue, October 13, 2012 @ 12:10 am

    We are currently dealing with the reverse situation…Co-signer died during a period when borrower defaulted and was not paying on the loan. SallieMae has come calling against the estate of the deceased co-signer, seeking payment in full for the loans. Ah, stupidity.

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