Co-signer Can Put Student Loans Into Default

Banking, finance, and taxes

Published: April 22, 2014 6:40 am

Last Updated: April 22, 2014 7:13 am

The Consumer Financial Protection Bureau has put out a bulletin with extraordinary information. If the co-signer on a student loan dies or files for bankruptcy, the student loan can be forced into default — even if the payments on the loan remain current.

The report states:

Today, we released a report that describes complaints we received related to the private student loan industry’s practice of placing borrowers in default even when their loans are current and in good standing. We’re also warning consumers that they can avoid surprise defaults by pursuing a co-signer release.

The vast majority of private student loans today have a co-signer (typically a parent or a grandparent). Having a co-signer can often lead to a lower interest rate, which can save you money in the long-term, because the co-signer will have to repay the loan if you don’t.

However, your loan might also contain provisions that allow your student loan servicer to put you in default — even if you’ve been making your payments on time.

That’s because your co-signer is also on the hook for your loan and therefore changes in their behavior can impact your loan, causing your loan to default and making your entire balance due all at once. We’ve received complaints that private student loan servicers are placing borrowers into default when their co-signer dies or files for bankruptcy.

The agency offers some relief, but it will not work in all cases:

If you are a co-signer or have a student loan with a co-signer and you are in repayment, you should look into what’s called “co-signer release.” You should consider this option to avoid a surprise default. Both the borrower and co-signer can benefit from obtaining the release.

Many lenders advertise that a co-signer may be released from a private student loan after a certain number of consecutive, timely payments and a credit check to determine if you are eligible to repay the loan on your own. If your lender offers co-signer release, you will want to ask about this benefit and remove your co-signer as soon as you are eligible.

The provision does not mean a thing for the many students who are not current with payments and those with strong credit. Some people with student loans have never had a job, or have a low-paid one, which means they cannot pass a credit check at all.

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