CFPB Finds Private Student Loan Borrowers Face "Auto-Default" When Co-Signer Dies or Goes Bankrupt
Wednesday, April 23, 2014
FINANCIAL PROTECTION BUREAU FINDS PRIVATE STUDENT LOAN BORROWERS FACE
“AUTO-DEFAULT” WHEN CO-SIGNER DIES OR GOES BANKRUPT
Publishes Consumer Advisory and Sample Letters to Help Borrowers Release
D.C. – Today the Consumer Financial
Protection Bureau (CFPB) Student Loan Ombudsman 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, today the CFPB also
issued a consumer advisory and sample letters.
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
The CFPB Student Loan
Ombudsman’s Mid-Year Report is available at: http://www.consumerfinance.gov/reports/mid-year-report-on-private-student-loans-2014/
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
Today’s 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.
Today’s report describes steps private student lenders
could take before pushing the borrower into default and immediately demanding
the entire loan balance upon co-signer death or bankruptcy. For example,
lenders or servicers could first determine whether the borrower qualifies for a
co-signer release, which would maintain loan repayment on the original terms.
If the co-signer cannot be released from the loan, lenders could honor the
existing payment schedule for a designated time period so that borrowers can
identify a new co-signer or refinance the loan.
Helping Borrowers Release Co-Signers
Today the CFPB issued a consumer advisory to
borrowers about how to release their co-signers from their loans. 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 the borrower is eligible to repay the loan on their own. But most student
loan servicers do not tell consumers when they are eligible to release their
co-signer, so consumers need to ask directly for information on how to do
help borrowers release their co-signers, the CFPB has put together instructions
that consumers can edit and send to their student loan servicer. They can
download sample letters to send by mail, or they can just cut and paste the
text when they log into their account on the servicer’s website. Sample letters
include those from the student who may want to release their co-signer, and
those from the co-signer who may want to be released.
The advisory can be found at: http://www.consumerfinance.gov/blog/consumer-advisory-co-signers-can-cause-surprise-defaults-on-your-private-student-loans/
The sample letter on how a borrower can
release a co-signer is at: http://files.consumerfinance.gov/f/201404_cfpb_inquiry-letter_how-to-release-cosigner.doc
The sample letter on how to be
released as a co-signer is at: http://files.consumerfinance.gov/f/201404_cfpb_inquiry-letter_how-to-be-released-as-cosigner.doc
The Dodd-Frank Wall Street Reform and
Consumer Protection Act established an ombudsman for student loans within the
CFPB to assist borrowers with student loan complaints. The ombudsman is
submitting today’s midyear report to the Director of the CFPB, the Secretary of
the Treasury, the Secretary of Education, and Congress.
The CFPB began accepting consumer complaints
about private student loans in March 2012.
More information is at: consumerfinance.gov/students