Co-Signing a Loan: Unintended Estate Planning Consequences

Every year thousands of students take out loans to fund their education. Since most students have very little credit history, they often will have a parent (or sometimes grandparent) co-sign their loan. Students and parents often sign for such loans without full understanding of potential consequences.

Within these loan agreements are often a provision that can cause a family considerable harm: if the co-signer dies or files for bankruptcy, the loan holder can demand complete repayment. Thus, if a grandparent c0-signs a loan with a student and passes away, the student may be compelled to make complete and immediate repayment. If the student fails to do so, then the loan will go into default and negatively impact the student’s credit record. This is a serious concern especially when student and relative have co-signed for a loan of tens, if not hundreds, of thousands of dollars.

The converse of this situation can be equally as problematic: if the student dies, the co-signer may be obligated for the full amount of the loan and compelled to make immediate repayment. In 2010, the Wall Street Journal published an article, “When Student Loans Live On After Death” which highlights how this problem can devastate a family.

Either of these scenarios can have disastrous effects on a co-signers, estate plan either by transferring an immediate amount of debt to a student or creating a large debt that can derail retirement plans.

One solution is that students can protect themselves and co-signers by releasing the co-signer from the loan after the student has obtained several years of earning and built up positive credit history. The main point is to THINK BEFORE YOU CO-SIGN.

I wish you all the best,

Josh Robbins

Of Counsel

Scafidi, Juliano & Hurd, LLP

310 Washington Street, Suite 201

Wellesley, Massachusetts 02481

(T): 781-210-4710

(F): 781-210-4711



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