08 Jan When a Parent PLUS co-signer dies

Q. Our dad co-signed for a Parent Plus loan for his granddaughter because her mother, my sister, had poor credit. The amount was $16,000. It is in deferment as long as she is in school. He is almost 92 and he’s now in a skilled care nursing home. When he dies or if my sister defaults on payments, will they come after his assets or estate?
— Worried

A. This is a tough one because it will depend on the specifics of the loan agreement.

As an endorser or co-signer, you are not entitled to all of the same benefits as a Direct PLUS loan borrower and not all of the terms and conditions apply, said Patricia Daquila, a certified financial planner and certified public accountant with Lassus Wherley, a subsidiary of Peapack-Gladstone Bank, in New Providence.

In the case of a Parent PLUS loan, the loan would be discharged upon the death or permanent disability of the parent who took out the loan, or the death of the student on whose behalf the loan was taken out, she said.

Proof of death or disability would need to be given to the servicer in order to discharge the loan.

However, in this case, your dad is the co-signer.

“Therefore, I would recommend reviewing the loan agreement and looking for a specific clause that mentions the co-signer or even the death of a co-signer,” Daquila said. “Many private lenders have clauses that would make the entire balance payable in full if the co-signer dies or is disabled.”

If this is the case, then your sister can appeal to the lender for a release of a co-signer if your father has developed a terminal illness or dies, she said.

Her goal would be to convince the lender that she can handle the payments without the co-signer’s guarantee. However, not all the lenders will allow a release of a co-signer, Daquila said. It will depend on several factors including credit history, income and expenses.

“Another possible solution if the lender will not allow a release of the co-signer is to potentially find another co-signer and refinance the loan. She may be able to reduce her interest rate and lower her monthly payments,” Daquila said. “However, the new co-signer would need to have a good credit history.”

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