The Consumer Financial Protection Bureau (CFPB) Student Loan Ombudsman has released a report highlighting complaints of “auto-defaults” in private student lending. Borrowers report that some lenders demand immediate full repayment upon the death or bankruptcy of their loan co-signer, even when the loan is current and being paid on time. Borrowers also describe facing bureaucratic barriers to releasing co-signers from their loans, a commonly advertised benefit that could help avoid auto-defaults. To help borrowers overcome obstacles to co-signer release, the CFPB also issued a consumer advisory and sample letters.
“Students often rely on parents or grandparents to co-sign their private student loans to achieve the dream of higher education. 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. A borrower should not have to go through an obstacle course.”
The CFPB Student Loan Ombudsman’s Mid-Year Report is available here.
The CFPB has estimated 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, a federal student loan borrower is required to have another individual endorse their loan, but the borrower is not placed into default when that person 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 percent of new private student loans are co-signed, often by a parent or grandparent.
This report analyzes more than 2,300 private student loan complaints and more than 1,300 debt collection complaints related to student loan debt submitted between October 1, 2013, and March 31, 2014. 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. Among the issues that consumers face:
►Auto-defaults when a co-signer dies: Many consumers assume that the death of a co-signer, often a parent or grandparent, will result in the release of the co-signer’s obligation to repay. But many private student loan contracts provide the lender with the option to immediately demand the full loan balance upon death of the co-signer. These auto-defaults may be occurring when data from probate and other court record scans are matched with a financial institution’s customer database, without regard to whether the borrower is in good standing. These defaults are also typically reported to credit bureaus and negatively impact the credit profile of a borrower.
►Auto-defaults when a co-signer enters bankruptcy: Many private student loan contracts also allow the lender to place a loan in default if the borrower’s co-signer files for bankruptcy. Even if the loan was in good standing prior to and while the co-signer is in bankruptcy, borrowers submit complaints detailing how they face auto-defaults, including consequences such as credit damage and frequent debt collection calls.
►Obstacles to releasing co-signers from the loan: Borrowers face bureaucratic barriers when seeking to release their co-signer, even though this benefit was advertised before the loan was taken out and could help avoid auto-default. Consumers continue to complain that the rigid and opaque standards for co-signer release make for a mysterious process. For example, consumers note that required forms are often not available on websites or in an electronic form. In addition, servicers do not seem to be proactively notifying consumers about the specific requirements to process a release.