The Consumer Financial Protection Bureau (CFPB) said in a report today that some people who pay private student loans on time are being placed in default when the co-signer of their loans dies or declares bankruptcy, the Washington Post reported today. These “auto defaults” force borrowers to either immediately repay the full loan balance or ruin their credit, hurting their chances of getting a job, renting an apartment or buying a car. In its mid-year report on student loan complaints, the consumer bureau highlighted grievances that have emerged with more than 90 percent of private loans now being co-signed. Chief among the 2,300 complaints about private student loans submitted to the bureau in the past five months was the triggering of a default by the death or bankruptcy of a co-signer, even if the loan was being paid on time. To ease the burden on borrowers, the CFPB recommends that lenders consider alternatives to these defaults, such as giving the borrower the chance to find another co-signer. The bureau issued a set of sample letters that consumers could use to petition lenders to release a co-signer from the contract.
For further analysis of the student debt crisis, be sure to attend ABI’s Student Debt Symposium on May 30 at the Georgetown University School of Law. Please click here for more information.