CFPB Says Student Loan Co-Signers Can Cause “Auto-Defaults”

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By Consumers Union on Tuesday, April 29th, 2014

Last week, the Consumer Financial Protection Bureau (CFPB) released a mid-year report featuring new complaints from borrowers with private student loans.  The newest troubling trend? – co-signers who file for bankruptcy, or pass away, causing a student loan borrower to “auto-default” even though the loan is being paid on time.

This seems patently unfair, given that the vast majority of students who apply for private loans have to get a co-signer in the first place.  Since the 2008 financial crisis, lenders have tightened their standards so that most students have to get a co-signer, usually a parent or grandparent, who is willing to be on the hook for the loan if the student can’t repay it.  Having a co-signer can also get you a lower interest rate, which means paying less interest over time.   Some lenders advertise that once you show a history of making payments on time and pass a credit check, you can get a “co-signer release” so the loan is only in your name.

The CFPB got complaints from borrowers who were paying on time, only to be blindsided by their lender saying the loan is in default and must be paid immediately and IN FULL.  Others tried to get their co-signers released after making a few years’ worth of on-time payments, but couldn’t get a straight answer or find the proper forms to fill out in order to get their release processed.

The CFPB has also issued a consumer advisory with tips for borrowers who have co-signers – a must-read if you have a private student loan.

Do you have a private student loan?  Are you a co-signer on a private student loan?  Do you think “auto-defaults” make any sense??  Tell us in the comments.

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