Wills, Trusts & Estates Prof Blog

Editor: Gerry W. Beyer
Texas Tech Univ. School of Law

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Friday, April 25, 2014

Borrowers Beware: Risks Associated with Loans and Co-Signers

Loans

Every year thousands of students across the country take out loans to pay for their schooling.  For students who borrow money on the private market, the death of a parent can come with an unforeseen added blow. 

Because many people who take out loans to pay for school have minimal credit history, they typically need co-signers, which is usually a parent or relative.  Most private loan contracts contain a barely noticeable provision, but one proving to be deeply problematic: if the co-signer dies or files for bankruptcy, the loan holder can demand complete repayment.  If the loan is not repaid, it is considered to be in default, consequently harming the borrower’s credit record. 

Borrowers are often able to have their loans released from the co-signer requirement after they obtain several years of earnings and credit history or can have the loans transferred to a new co-signer.  However, the Consumer Financial Protection Bureau admitted borrowers are frequently not aware of these options.  “Borrowers need to be aware that these defaults can seriously impair their credit profile, making it hard to start a business, or buy a house or car.”

See Richard Perez-Pena, Student Loans Can Suddenly Come Due When Co-Signers Die, a Report Finds, The New York Times, Apr. 22, 2014.

http://lawprofessors.typepad.com/trusts_estates_prof/2014/04/borrowers-beware-risks-associated-with-loans-and-co-signers.html

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