What Happens If a Cosigner On a Private Student Loan Dies?

Updated on January 23, 2024

After a student loan cosigner dies, the lender will still seek payment from the primary borrower, like a landlord would expect rent from the other people on the lease. The cosigner’s death may also trigger an automatic default clause in the loan terms, even if the student loan payments are still being made on time.

But these clauses are becoming rarer due to pressure from the Consumer Financial Protection Bureau.

If your loan has this type of clause, it can negatively affect your credit score and make it more difficult and expensive to take out a mortgage or auto loan or get a credit card.

To avoid this:

Check your promissory note and see if your loan has this clause.
If it does and your cosigner is still alive, ask your loan servicer about the process for getting a cosigner release.
If they refuse, look to refinance with a new private lender.

But if your cosigner has passed, your lender may be able to add a default status to your loan, leaving you on the hook to pay the entire balance immediately.

Many private lenders removed automatic default clauses

A few years back, under pressure from the Consumer Financial Protection Bureau, private student loan lenders like Discover, Navient, Wells Fargo, Sallie Mae, and others nixed auto default clauses from their contracts.

No longer will borrowers be thrown into default when a cosigner passes away or files for bankruptcy.

Richard Hunt, President of the Consumer Bankers Association, informed the then CFPB director Richard Cordray that the ten member banks that offer student loans had changed their ways. No longer will the banks trigger a default in case of a cosigner’s death or bankruptcy.

Not only will these changes apply to new loans, but Hunt also noted that the banks would start the same policy for existing loans. “We’re committed to helping families finance higher education and want to provide private education loans with terms that are clear, fair, and responsible for both consumers and lenders,” wrote Hunt. “And we share our customers’ interest in successfully repaying their loans, even in the toughest times, like the death of a loved one.”

Treatment by lender

Discover may go after the cosigner’s property if they die, but it won’t put the loan in default. Discover won’t let you release the cosigner even if on-time payments were made for several years.
Navient typically releases the cosigner if they die, and it won’t put the loan in default.
Sallie Mae releases the cosigner if they die and waives the current balance if the student borrower dies.
Wells Fargo typically releases the cosigner if they die, and it won’t put the loan in default.

Special rules for community property states

The death of a cosigned spouse can significantly impact private student loan debt, and the consequences will depend on where you live.

In community property states, post-marriage debts are often considered a shared obligation, even if only one spouse is named as the borrower. This means the lender could come after the surviving spouse for the loan balance, whether through inheritance, life insurance policy proceeds, or personal funds.

But pre-marriage debts may not be the responsibility of the surviving spouse, as the laws vary.

Speak with a student loan attorney in your area to understand how your state approaches such cases.

No taxes

Previously, the IRS treated canceled debt as income, leading to a tax liability that could attach to the cosigner’s estate. But the Tax Cuts and Jobs Act of 2017 changed that. It created an exclusion from income for student debt discharged due to the death of the borrower

Under old tax laws, if student debt was canceled due to the death of the borrower or cosigner, it was considered income. But the Tax Cuts and Jobs Act of 2017 put a stop to that. Now if student debt is canceled or discharged due to the borrower or cosigner’s death, the amount forgiven is exempt from being counted as income.

Federal student loans rarely have cosigners

The U.S. Department of Education rarely makes federal student loan borrowers find someone to co-sign their loans. The one exception is if they’re borrowing a Grad or Parent PLUS Loan and have a poor credit history with late payments and debt collections on their credit report. In that case, they’ll need a cosigner.

Borrowers can eliminate the endorser by consolidating the loan into a Direct Consolidation Loan.

What to do if your private student loan cosigner dies?

If the cosigner on your private student loan dies, here are steps you can take:

Contact your loan servicer. Contact your student loan servicer as soon as possible to inform them of the cosigner’s death and see if they offer a death discharge, which would remove the cosigner’s liability from the loan. You may need to provide a copy of the death certificate.
Consider refinancing. If your loan agreement has a default clause, consider adding a new cosigner to maintain good standing. Discuss this option with a family member or close friend who may be willing to cosign. If adding a cosigner won’t keep you out of default, explore refinancing with a new lender. Refinancing may give you a lower interest rate and better loan repayment terms.
Ask about a settlement. If your loan is in default, look to negotiate a settlement that lets you pay less than you owe in exchange for a lump sum payment or by making monthly payments over a short period.

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