Here’s a valuable article about college loans authored by a colleague of mine, John Payne, who is one of the nation’s premier elder law attorneys. He is pleased to allow me to share it with you.
Student loans are a burdensome fact of life for Americans of all ages. Post-secondary education is viewed as necessary for a lucrative occupation, either initially for a high-school graduate deciding on a career or later in life for an experienced worker who finds his or her previous employment choices disappearing. Tragically, the loan bargain many thought would help them escape poverty turns out to plunge them deeper into debt and further foreclose a brighter financial future.
The premise is that achieving educational goals financed through loans will result in income high enough that the loan can easily be paid off and will support a better lifestyle throughout the student’s career. Unfortunately, the recession at the end of the Bush Administration doomed many college graduates to low-wage jobs and years of struggle under the yoke of college debt. Also, for-profit schools like ITT lured hopeful veterans, low-wage and “downsized” workers, and persons with disabilities into training programs for clerical, mechanical and paraprofessional jobs. The jobs that were touted as lucrative and plentiful in the schools’ promotional literature, proved to be neither for those who received their diplomas or certificates. Even more catastrophically, many of these schools, like ITT, have closed their doors on their students. This left those students with nothing but loan debt.
There is a further hazard for student-loan debtors that is largely unknown and generally not explained to loan applicants who have co-signers. The hazard is that the loan may become immediately payable in full if the co-signer declares bankruptcy or dies.
The debtor must report the bankruptcy or death of a co-signer to the creditor. Failure to do so may be a default on the loan.
There are four possible results of co-signer death:
1. There might be no effect. Not all student loans have an acceleration clause triggered by the death of a co-signer.
2. The creditor may hold off on acceleration as long as payments are made as agreed.
3. The creditor may give the debtor the opportunity to apply as a sole debtor, without a co-signer.
4. The creditor may treat the event as a default and demand immediate payment in full.
This last alternative would result in a financial meltdown that could devastate the student-loan debtor. The default in one student loan could trigger defaults in other loans. Despite the lack of any blame on the debtor’s behalf it could take decades for him or her to recover.
A student-loan debtor with a co-signer should review the loan agreements to determine what would happen if the co-signer declared bankruptcy or died. This is particularly urgent if the co-signer does not have substantial net worth or is in declining health.
The debtor should place a high priority on getting a co-signer released from the loan. This may be possible under the following conditions: A) the debtor must be an adult, B) the debtor must have steady employment with good income and good credit, C) at least 12 months have passed since the debtor graduated or received a certificate of completion from the educational institution, and D) the debtor must have promptly made all required payments on the debt for at least 12 months. Different loan servicing agents have different requirements and 12 months of regular payments would be the bare minimum. Procuring a release for the co-signer may be an ordeal, but the project must be begun or it will never be completed.
Unfortunately, a bill to eliminate automatic default on the bankruptcy or death of a co-signer, the Protecting Students From Automatic Default Act of 2014, died in the 113th Congress. The terrible burden of student loans on individual borrowers and society at large is an important issue in the 2016 presidential and congressional elections. Will the attention turn out to be political hot air, or will there be significant reform? Time will tell whether Congress will reverse decades of allowing rapacious financial institutions and for-profit schools to prey on hopeful students. In the meanwhile, student-loan debtors must examine their loan documents and make plans to deal with the pitfalls they find there. Crossing one’s fingers and hoping or praying for the best is not an adequate plan.