The last thing families want to deal with after the death of a loved one is a phone call reminding them of their departed’s debt. But that’s the case for a number of parents who have inherited the obligation to repay the student loans they co-signed for their deceased child.
More and more families are finding themselves struggling financially with few options of relief after taking on their child’s student loan debt, CNN Money reports.
That’s certainly the case for Steve and Darnelle whose daughter, Lisa, died five years ago. The couple quickly took in their three young grandchildren, but also received a rather unwelcome addition: $100,000 in student loan debt.
Years before her death, Steve had co-signed Lisa’s private student loans so she could attend nursing school and now, after her death, he was on the hook to repay the lenders.
The couple, who live on a modest salary and are now raising three children, struggled to make the loan payments each month. They depleted their savings and ruined their credit, Steve tells CNN, and eventually the loan debt ballooned to $200,000 because of late penalties and interest rates as high as 12%.
The situation would be markedly different if Lisa had taken out federal student loans. In that scenario, the couple could have had the loans discharged or received some kind of financial assistance.
Few Avenues To Receive Help
Instead the family is left grappling with their new reality and finding little in the way of help from the lenders.
Steve called each loan issuer to explain his situation, and while most expressed sympathy for his situation, none were required to actually do anything.
Private loan issuers have full discretion when it comes to doling out loan forgiveness, Deanne Loonin, an attorney at the National Consumer Law Center, tells CNN Money.
In fact, private lenders aren’t bound by the same federal requirements that federal student loans must adhere to, meaning private lenders don’t have to offer help to borrowers or co-signers unless they want to.
A few private loan lenders did offer Steve and Darnelle relief – albeit on a small scale.
Officials with Navient Corp., the recent offshoot of Sallie Mae, say they provided the family with a reduced balance and lower interest rates in the past. Additionally, Steve reported that after the lender was contacted by CNN, it lowered his interest rate to 0% on three out of four loans and reduced the amount owed by $8,000 to a total of $27,000.
Still, the company that handles the majority of the private loans now owed by Steve and Darnelle says it’s only in charge of collecting payments and can’t make the rules on forgiveness. Instead, the family would need to contact the original lender, National Collegiate Trust. And Steve did just that, only he says the company refused to provide any kind of help.
It Won’t Disappear In Bankruptcy
While many consumers facing hardships because of debts would simply file for bankruptcy, that’s not an option for Steve and Darnelle, and families in similar situations.
Unlike mortgages, credit cards and auto loans, neither federal nor private student loans can currently be discharged in bankruptcy.
“People with other debt from splurging — they can discharge that,” he tells CNN Money. “Student loans should really be the one type of debt they do discharge because it’s done to further an education and career. But somehow getting [my daughter] an education has encumbered me for the rest of my life.”
Loonin, with the NCLC, says that in rare cases parents can try to prove undue financial hardship in court to get debts discharged in bankruptcy. Otherwise, the only other option is to attempt to work out a payment plan with lenders.
Attempts To Reform Rules
Cases like Steve and Darnelle’s inspired Iowa senator Tom Harkin to introduce a bill in June that would, in part, allow private student loans to be discharged through bankruptcy proceedings.
Although the bill has little chance of being passed, it’s not the only legislative proposal made this year that would have given private student loan borrowers a bit of much-needed relief.
A bill, introduced by Massachusetts senator Elizabeeth Warren in May, would have allowed federal and private student loan borrowers to refinance to rates set for first-time borrowers – approximately 3.86%. That measure died on the Senate floor when it didn’t garner enough votes of support.
Taking The Issue To The Masses
With relatively few options left, and his dreams of retirement disappearing, Steve and Darnelle turned to Change.org to petition the president to allow student loans to be eligible for discharge in bankruptcy. So far, the petition has 1,064 signatures.
This isn’t the first time grieving families have turned to the online petition site when seeking recourse for the private student loans they’ve inherited.
CNN Money reports there have been four other attempts by families, one of which was successful. In that case the brother of a deceased borrower petitioned the bank to stop seeking payments from his grieving father and the loan was eventually forgiven.
Another petition, created by Virginia mother, Angela, asked private loan provider First Marblehead Corp. to forgive her son’s $40,000 in student loans after he was murdered in 2008. While that petition received more than 150,000 signatures, no action was taken by the lender.
Just Another Problem With Co-Signed Loans
The situations faced by these families further illustrates the problems associated with the practice of co-signing private student loans.
In many cases, lenders require a co-signer in order to issue these loans and to minimize the interest rates. In 2011, nearly 90% of all private student loans included a co-signer; someone who, in the event that a borrower can’t repay their debt, is obligated to do so.
The Consumer Financial Protection Bureau reported this spring that automatic-defaults associated with private student loans were at an all-time high.
Borrowers have increasingly found themselves put in automatic-default at no fault of their own. The issue occurs when a loan issuer finds out the loan’s co-signer has died or filed for bankruptcy.
Although the two co-signer situations are admittedly different, they are a alike in the fact that little recourse is available for borrowers.
“Private student loans should really be a last resort, if possible,” the CFPB’s Rohit Chopra, told Consumerist earlier this year. “When you run into trouble you often have very few options to navigate tough times.”