And many student loans require a co-signer in order for the loan to be approved, which means if something happens to the primary borrower, the co-signer may suddenly be pursued for the student loan by a debt collector.
Getting a co-signer released from a student loan can be tricky, but in many situations there is a way out.
Co-signers can be released from the loan
The good news is that co-signers can be released from liability on a student loan. The circumstances will greatly vary depending on the type of student loan (federal or private) and the actual terms of the loan.
For example, for a federal student loan, if the primary borrower dies, then the loan can be discharged (and any co-signer is released). Or if the primary borrower becomes permanently disabled, same thing.
It’s a bit tricker for private loans. For many private student loans, the death of the primary borrower automatically triggers default and the lender can request payment in full. When this happens, the student loan is usually referred to a debt collector.
Student loan debt collectors generally get paid on commission, which means they usually have a strong incentive to collect the debt, rather than explain how a consumer’s obligation can be discharged.
I have represented at least one consumer where a private student loan was discharged due to the death of the primary obligor. Despite the fact that the loan had the provision, the debt collector was not aware of that option, and was unable to confirm that provision with the original lender. In another case, the primary borrower became disabled, and the co-signer was able to use that as leverage to negotiate a buyout for much lower than the balance of the loan.
Read the fine print and demand to know your options
The first step to determining your options is to read the fine print–and then read it again. In at least one case, reading the one print of the student loan terms led to a startling discovery: the co-signer could be released from liability by doing _________.
Yes, it’s amazing what is buried in those contracts. Enforcing that provision turned out to be slightly tricky, but once the company received a letter and the requisite documents, the issue was solved. For some loans, if the primary borrower makes a certain number of timely payments, the co-signer can be released from the loan.
If your student loan does not have an express provision, that does not mean all hope is lost. Start with the basics: call the lender and ask them what the policy is for releasing a co-signer. Many lenders have internal policies that they are not very excited to disclose or discuss.
The Consumer Financial Protection Bureau has also put together form letters that borrowers can use to learn more about getting a co-signer released from a loan.
When to seek legal assistance
If you have questions about modifying your existing loan, it’s a good idea to get legal advice before executing any legal documents. Especially if you are in a situation where the primary borrower is unable or unwilling to pay.
Lenders do not always disclose all of the options—and you may need assistance from an attorney in order to understand your options and your rights.