When families ask us about the pros and cons of using private education loans, the finance educators at College Coach are quick to point out that private loans can be less flexible and riskier than federal loans. In mid-March, the Senate passed a bill that, if eventually approved by the House and signed by the President, will make private student loans a little less uncertain. The Economic Growth, Regulatory Relief, and Consumer Protection Act is a revision of parts of the 2010 Dodd-Frank financial reform bill, and there are two obscure but troublesome features of private loans that it addresses.
First, one of the risks of borrowing private loans has to do with what happens in the unfortunate situation where either the cosigner or the borrower passes away before the loan is fully repaid. It’s important to understand your obligations in these rare, but tragic, circumstances.
When a cosigner dies (or declares bankruptcy), this bill prohibits lenders from putting the loan into automatic default or accelerating the repayment of the loan. This is good news for student borrowers, as we have heard awful stories of students who, after their parent cosigner passed away, were told they had to repay a loan in full immediately, or had to enter repayment while still in school. Under the new bill, the student borrower will still have to repay the loan if the co-signer dies, but it should be under more manageable terms.
In cases where the student borrower dies, some, but not all, lenders automatically discharge the loan completely. Read the fine print of your promissory note to find out if this is the case for your private loan. In cases where they do not discharge the loan, this bill releases the cosigner from the obligation to repay it. However, the lender can still try to collect the loan from the borrower’s estate.
There are two exceptions to these two provisions:
- A spouse who has cosigned a private loan does not meet the definition of “cosigner” for this section of the bill, and therefore, neither of these provisions are applicable to spouse cosigners.
- Even more importantly, these provisions only affect new loans made beginning 180 days after the bill is enacted. If you have existing private loans, you should read your promissory note immediately to understand what your lender’s current policy is for both of these tragic circumstances, and then plan accordingly. For some families, this means taking out a term life insurance policy on the borrower, the cosigner, or both.
The bill also provides possible relief for private loan borrowers who have defaulted on their loan. It allows lenders to offer a rehabilitation program for a defaulted borrower by establishing a number of consecutive on-time payments for the borrower to make. Once those agreed-upon conditions have been met, the borrower can request that the private loan default be removed from their credit record.
It’s important to note that the bill does not require lenders to offer a rehabilitation program or remove a default from a credit record, it just gives them permission to do so if they choose. Also, this default resolution can only be offered one time in the life of each loan.
When it comes to private education financing, every bit of consumer protection is helpful. Stay tuned to see if this bill becomes a law.