Here’s a question to ponder: How long should a student-loan company — or its subcontracted servicer — wait before attempting to collect on a debt from a grieving parent who had co-signed for her recently deceased son?
That’s the essence of a question that Sen. Sherrod Brown asked when he introduced a fellow Ohioan, Olivia Katbi at his recent press conference. Olivia is the sister of 24-year-old Andrew Katbi, a third-year Duke University law-school student who was killed a year ago when his car was rear-ended by a tractor trailer on Interstate 77.
Soon after his passing, Andrew’s family forwarded copies of the death certificate to his education lenders. Two of the companies immediately discharged his remaining obligations. A third, however, just couldn’t let it go. By Olivia’s account, the family endured nine months of incessantly harassing phone calls and bureaucratic runarounds. The company finally relented but, perhaps, only after Olivia’s ambitious social media campaign shamed the lender into it.
No parent is emotionally equipped to deal with a child’s death, let alone has the fortitude to untangle the administrative details of his life after the fact — which, in Andrew Katbi’s instance, had the added complication of co-signed student loans.
Brown hopes to help. He plans to introduce a bill that requires education lenders to more fully and clearly divulge fundamentally important contractual terms and conditions, and also to set forth their policies and protocols for dealing with a primary (student) borrower’s death or permanent disability.
Certainly, more disclosure is better than less, particularly for financial matters that many struggle to understand—without the added stress of a life-altering event. But if the ultimate objective is to somehow force the lenders into forgiving the debts of deceased primary borrowers as a matter of course, think again. A concession of that magnitude belongs in the standard contractual boilerplate. Otherwise, lenders or their agents will continue to grant forgiveness on a case-by-case basis.
Letting the Co-Signer Off the Hook
Co-signed loans are a form of credit enhancement. By requiring a second signature, the lender is, in effect, saying that the primary borrower doesn’t have what it takes to back the loan by himself. In the case of a young adult with little substantive credit history, conditioning a loan on the creditworthiness of a co-borrower makes sense — but not for the life of the loan.
As the young borrower begins to repay his debts, he also begins to establish a track record, which, over the course of two or three years, should amount to enough data for a loan application to be considered on its own merits. Add that to the fact that it’s virtually impossible to discharge student-loan debts in bankruptcy — which is a hefty credit enhancement by itself — and a strong case can be made for the release of a co-signer’s obligation after 36 reasonably on-time payments. I emphasize reasonably because we’re talking about inexperienced borrowers who don’t deserve to be so harshly penalized for missing a few due dates on their way to becoming familiar with the process of repayment. That’s what late fees are for.
While we’re at it, let’s also do something about lenders that automatically declare loans to be in default when the primary or secondary borrower dies, becomes permanently disabled or is financially compromised, even when the payments continue to be made. On time and in full.
Think about it: Which constitutes financial harm: the loss of a credit enhancement (the co-signer) or nonpayment on a loan? Any lender that’s foolish enough to pursue a technical (non-cash) default through a judicial system that favors hard-pressed consumers who still manage to meet their financial obligations may as well toss the money it will spend in legal fees out the window.
Moreover, if a lender is so worried about the health and well-being of its primary borrower — a young person who is statistically unlikely to meet a premature demise — or an older secondary borrower, another segment of the financial services industry has a cure for that. It’s called insurance — term life, not credit life — and it’s a lot cheaper than going to court or trying to battle a blistering Twitter campaign.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its affiliates.
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