If a private student loan co-signer either dies or declares bankruptcy, some lenders are pressuring the borrower to immediately paid the loan in full. The rising rate of “auto defaults” in such cases raised concerns with the CFPB, which issued a report Tuesday on the topic.
The CFPB analyzed more than 2,300 private student loan complaints and more than 1,300 debt collection concerns related to student loan debt submitted over the past six months. Many focused on auto default payment demands issued when co-signers die or declare bankruptcy, even when the loan is current and is being paid on time.
Many complaints also describe the bureaucratic barriers borrowers face in releasing co-signers from their loans, a commonly advertised benefit that could help avoid auto-defaults. The CFPB study contains a consumer advisory and sample letters to help borrowers overcome obstacles to co-signer release.
“Students often rely on parents or grandparents to co-sign their private student loans, and when tragedy triggers an automatic default, responsible borrowers are thrown into financial distress with demands of immediate repayment,” said CFPB Director Richard Cordray. “Lenders should have clear and accessible processes in place to enable borrowers to release co-signers from loans.”
The CFPB estimates that the combined total for federal and private outstanding student loan debt reached nearly $1.2 trillion in 2013. The majority of this debt is from federal loans, which borrowers typically take out on their own. In rare cases, federal student loan borrowers are required to have other individuals endorse their loans, but borrowers are not placed into default when those co-signers encounters difficulties.
Most private student loans, however, do require a co-signer. In fact, according to a 2012 report on private student loans, published by the CFPB and the Department of Education, more than 90% of new private student loans are co-signed, often by family members.
The report also offers steps private student lenders can take before pushing the borrower into default and immediately demanding the entire loan balance upon co-signer death or bankruptcy. Co-signer issues have routinely emerged as an area of concern for private student loan borrowers, and the complaints have covered a wide range of private student lenders who could make it easier for borrowers to dismiss their co-signers' responsibilities, the top CFPB executive said.
“A borrower should not have to go through an obstacle course,” Cordray said.
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