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]

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