Nearly 90 percent of private student loans have a co-signor. Taking on private student loans carries risks for both the primary borrower and co-signor. The co-signor adopts the risk of having to repay the student loan should the primary borrower - the student - fail to take responsibility for the debt. If a co-signor dies or declares bankruptcy an auto default is triggered and the remaining balance becomes due immediately. For students who pay on time, this can be a devastating financial blow. In order to protect themselves, borrowers may qualify for a co-signor release from some private lenders if their student loan payments are made on-time, and credit and income requirements are met.
Start with a request.
Students have to take the initiative to get the ball rolling by calling their servicer or researching the process online. Borrowers can also send a note, such as a form letter form the Consumer Financial Protection Bureau, requesting a release or an explanation of why they are not eligible. Here are two sources for form letters: http://www.consumerfinance.gov/newsroom/cfpb-finds-private-student-loan-borrowers-face-auto-default-when-co-signer-dies-or-goes-bankrupt/ and http://www.consumerfinance.gov/blog/consumer-advisory-co-signers-can-cause-surprise-defaults-on-your-private-student-loans/. There are standard requirements while terms may differ between servicers. The release is for students in repayment who are in good financial standing. The borrower will typically need to have made a set number of on-time, consecutive payments. The number can range from 12 to 48 payments.
Submit the necessary information.
The borrower will likely need to submit proof of employment, income information, credit reports and other financial documents. Income-to-debt ratio is important as well. Bottom line is to make sure money is available to pay the debt. In some cases, the application and supporting documents may need to be sent as hard copies. Some lenders may require the co-signor to sign off on the release as well.
Wait for approval.
Not all lenders are the same. It's estimated that approval is between 10 and 70 percent. Borrowers will likely be rejected if they have not been established long enough. Time may be all that is needed and several more on-time payments.
Consider refinancing or consolidating.
If a borrower can refinance by qualifying for a new loan independently, then they may be able to release the co-signor in the process. Make sure the interest is not worse than it was with the old student loans.
If a Borrower defaults.
The co-signor will be in a bad spot. They need to help the borrower by getting a temporary reprieve. Ask the lender for forbearance for several months.
Federal student loans may qualify for one of several options for a discharge, not through bankruptcy though. Even if the loans are discharged the federal government will look at the amount discharged and consider it taxable income, which is its own financial burden. Student loans are in default when payments are 270 or more past due. The federal government will use the Treasury Offset Program to seize federal payments owed to you (e.g., your tax return) in order to pay delinquent debts owed to a federal agency like the U.S. Department of Education. You will get notice before any offset occurs and you can contest before the amount is certified for offset. You can stop an offset if satisfactory payment arrangements are made. Up to 100 percent of your federal tax refund (and most state tax income returns) can be taken if you don't take action well before. Be sure to use all payment programs including rehabilitation. Private loans are another matter. If either the borrower or co-signor die, then the loan may become due immediately and it's unlikely they will be discharged.
However, simple strategy would be to obtain a life insurance policy. Get either level-term life insurance, where the payout stays the same each year, or decreasing-term, where the payout benefit falls in value over time as the loan is paid down. Be sure that life insurance is part of a larger financial plan and not a knee-jerk reaction.
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