Many private student loan contracts have a tiny little clause, hidden away in the obscure depths of the fine print. It’s written in formal and somewhat vague language, but it basically says that if the cosigner or the borrower dies or declares bankruptcy, the entire balance of the private student loan is due immediately. This can be true even where the borrower (or cosigner) has been making regular, on-time monthly installment payments and can continue to do so.
I call this the “death and bankruptcy clause.” It’s essentially an automatic default: if you can’t pay the entire loan balance right then, the “accelerated” loan will go into default and collections. Sometimes, borrowers are not even notified of the situation until the loan has been placed with a third-party debt collector and has been reported to national credit bureaus as charged-off or defaulted.
As you can imagine, this leads to terrible situations. Imagine a borrower who has a good job and is making regular payments, when the cosigner (perhaps a well-meaning family member who got into trouble, or an ex-spouse who the borrower hasn’t heard from in years) declares bankruptcy. Suddenly, the student loan is in default. Or how about the situation where the borrower’s mother dies – mom is a cosigner on the borrower’s private student loan, and hasn’t really had much to do with the loan since she originally signed for it. But now, the borrower is going to have to deal with default and a collections agency, on top of the grief of losing a parent.
Absurd, isn’t it?
Well, this little clause from hell might be getting extinguished.Read More