Private student loans are bad news all by themselves but when you add in a co-signer, things can get very financially messy.
Co-signers think they are doing a nice thing for their relative or child when they co-sign. They think they are helping to further the persons education and give them a hand-up in life. But often what they are doing is sending them down a black hole of debt that the student will never be able to repay and the co-signer will be on the hook for. According to current data more than 90 percent of private student loan lenders require a co-signer these days.
Lenders require co-signers, not to help the student qualify for the private student loan but to have someone to go after if the student defaults on the loan.
Once someone is unlucky enough to cosign for a private student loan it can end in misfortune for either the borrower and co-signer.
Many students are facing demand for full payment for their private student loans when the co-signer either dies or files bankruptcy, says the Consumer Financial Protection Bureau (CFPB). The situation is know as auto-default and is completely beyond the control of the student borrower.
“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.
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.
To avoid one of those nasty auto-default situations the CFPB suggests should try to get the co-signer released from the loan and co-signers should make efforts to get off the loans when possible.
And many private student loan lender advertise it is possible for a co-signer to be released from the student loan but make it a complicated and unwieldily process. Furthermore the lenders are not proactively letting students know when their loans qualify to have the co-signers released.
To help remedy the situation, the following instructions and letters can be used by students and co-signers can use to break the bonds of the obligation.